I’m Jen Quintana, my husband and I have dabbled in real estate investment over the years. We purchased our first home in 1999, a small 2 bedroom 1 bath in a suburban area of Los Angeles.
Since then we’ve bought several other primary residences and two rental properties. Now we’ve 1031 exchanged our rental property in California and purchased a bed and breakfast in Hawaii. When our new business in Hawaii was closed for the pandemic and my husband was laid off from work, we decided to consolidate our expenses and relocate to Hawaii while we wait out the pandemic. Although we owned the BnB, it cannot be converted to our primary residence without huge tax implications so we needed to purchase another place to call home. On a limited budget we found the perfect solution. A leasehold condo. We love learning new real estate tricks to help us turn a profit and it turns out Hawaii’s niche leasehold properties are one of those opportunities.
Heading into the housing recession of 2009, our careers provided us with income but like most Americans we spent nearly as much as we earned. We had a nice life, lived in nice neighborhoods, had nice cars and our children attended private schools. We were able to vacation but we didn’t have much saved up for retirement. With interest rates low since my mid 20s, stocking cash away in investment accounts like our parents did – didn’t seem like the solution. When our first humble home appreciated enough in the first two years to allow us to withdraw equity as the down payment on a rental property we were thrilled. My sister needed a place to call home and buying a duplex was the right solution. It helped our family and it seemed like a good way to grow capital by investing the equity from our home. Housing prices skyrocketed and we made a nice profit from that first house when we sold it in 2004, we also sold the duplex after my sister passed and re-invested the profit into another larger rental property. Back in those days you could buy a home or investment property with as little as 5% down. That has fluctuated over the years since the housing recession of 2009. Capital gains from a primary residence is tax free money up to $250k for single individuals and $500k for couples. Our initial down payment in that first house turned a nice tax-free profit for our family. We then had a larger down payment for our 2nd home in a nicer neighborhood with more space. We were able to take advantage of a 1031 exchange to re-invest the rental property proceeds and avoid paying taxes on those dollars as well. And all the proceeds being invested in new properties provided a good amount of equity from the start. That was equity we were able to borrow against when we needed to bridge the gap of my husband’s un-employment. Fortunately our family’s lifestyle suffered little disruption and we were able to hold on to two properties during the recession. Savvy real estate investing has proved to be a good practice for our family. We no longer hold onto the ideal of paying off a 30 year mortgage, rather we build equity and re-invest every five to ten years.
When the pandemic hit we found ourselves in a similar situation as we did during the recession. My husband was laid off and my work also dried up. We had enough cash on hand from the sale of our third primary residence to live for 6 months with no income but as the pandemic showed no signs of easing we knew we needed to consolidate our expenses fast. We packed up, closed out a rental property we had been temporarily leasing in Los Angeles and moved to our BnB in Hawaii. The problem was that the home in Hawaii was purchased with 1031 exchange money as a re-investment from the sale of our 2nd rental property in Los Angeles. This meant we couldn’t live there for more than 17 days without violating our 1031 exchange rules and risking being taxed on those re-invested capital gains funds. We had to find another primary residence but with no income we didn’t have a lot of choices and in such an uncertain financial year, we didn’t want to get into another lease.
After searching the MLS for weeks ahead of our move, I found the cheapest condo on the island and called my realtor. She confirmed that the price was in fact cheaper than usual because it was a bank owned foreclosed property. That didn’t scare me, so long as the bank owned it and the title was clear, for that price I could deal with any remodel, deferred maintenance or repairs that would be needed.
She also explained that it was a leasehold property. I wasn’t sure if I should be afraid of a leasehold so I did some research. A leasehold property is one where the purchaser is purchasing the building but the land is owned by someone else. There is a lease agreement between the building owner and the land owner to lease the land for a set amount of money each month. That landlease is transferred to the buidling purchaser as part of the escrow. Because the land isn’t included in the purchase agreement, the price is much less than a traditional real estate purchase. This was a condo, so owning the land wasn’t really part of the attraction for me. It was a place to call home. In a traditional condo purchase each condo owner owns a portion of the land – called fee simple ownership. In the leasehold arrangement, a third party owns the land and each owner pays a lease amount to the landowner – sometimes arranged through the Home Owner Association. Leaseholds are negotiated for large swaths of time, usually 30 or 40 years.
When considering a leasehold property the first question that came up for me was, what if the land holder doesn’t renew the lease? There is a natural assumption that at some point in the future the building investment could be lost – but it turns out that is not something to worry about. In Hawaii where leaseholds are common I learned that no land holder has ever taken back the land or not renewed the lease. I also learned that some landowners sell the lease to the building owners when they want to cash out their equity. The landowner of the leasehold condo we own has opened up land purchase to condo owners several times over the years. In the past condo owners could purchase their land interest for $100,000. Several condo units in our buildings have purchased a share of the land. So our building is called a mixed fee simple and leasehold building. This further assured me that the land will not be sold in its entirety to a third party with an eye toward changing its use. I’ve also learned that some homeowner associations have bought out the land lease and included the lease fee in the HOA dues, ensuring that the land is held for the benefit of the condo owners. Both of these schemes and the realization that a leasehold landowner has never rescinded or not renewed a land lease was very re-assuring.
By considering a leasehold property we were able to purchase a condo valued at $150,000 that would have been valued at $300,000 if the land was included in the cost of the property. We determined that the added $150,000 in our mortgage would have cost $800+ a month as a mortgage payment. The leasehold fee is only $450 a month and has 20+ years remaining on the lease. I quickly calculated the savings as, $84,000 in mortgage dollars over the course of 20 years. I can either put that amount aside to purchase the land the next time the owner opens it up for sale to the condo owners or I can take the savings and put it in my own pocket since I don’t plan to hold the property for 20+ years.
One of the considerations for buying a leasehold is that banks require the mortgage duration be shorter than the remaining lease hold agreement. If the leasehold only has 15 years remaining the bank will want the mortgage to be completed before the end of the lease, this restricts buyers to a shorter mortgage term. Properties at the end of their land lease, for example, if 6 years are remaining on the land lease – mortgage lenders would restrict potential buyers to a 5 year mortgage or all cash sale. How long a leasehold investor wants to hold the property is a consideration. Selling a leasehold property will have the maximum of potential buyers when the leasehold is longer than 30 years.
For an investor with cash to re-invest, a leasehold provides a unique opportunity because the price of the condo may be artificially lower as the lease years decline, reflecting the reduced pool of buyers in the market. This makes a leasehold property a perpetual buyers market even in a real estate year with low inventory, traditionally called a seller’s market.
Since the property is a foreclosure I was able to purchase it well under the $150,000 value. We were able to withdraw cash from our retirement accounts without an extra penalty during the pandemic thanks to a provision in the Cares Act which opened access to those invested funds for people who experienced a hardship and are under the retirement age. That window is open until the end of 2020. We used those funds to purchase the condo.
Our HOA collects a reasonable HOA fee that covers maintenance of the pool and grounds and all the utilities. Additionally, I pay $450 for the lease hold which I conveniently remit to the HOA. We have one payment to the HOA for all of our condo related expenses (HOA fee, utilities and leasehold). We have no mortgage. With the looming deflation of the dollar post pandemic bail out I feel confident that my money is better off invested in real estate than our old 401k plans. After investing in some new appliances, paint and a minor bathroom and kitchen remodel – we furnished the small one bedroom condo and now enjoy walking a block to the beach, swimming in the pool and all the amenities and restaurants of the Kaanapali resort area on Maui. Our building is not zoned for vacation renters so we have a nice cohort of long term neighbors who gather at the pool on weekends and are very friendly and invested in the building and neighborhood. We couldn’t be happier.
I would definitely invest in a leasehold property again. Financially it makes a lot of sense for a primary residence and it would be a great way to purchase a vacation rentable property with a monthly income potential that would exceed the expenses. We’ll do it again!
3 thoughts on “I Bought a Leasehold Property and I’ll do it Again!”
Sounds like a good investment type 🙂
Damn woman! You are one of the smartest cookies I know! I am thrilled to see you are doing so well in Hawaii. Keeping that BnB in mind if travel ever becomes possible again. Did I read correctly that it is a one bedroom condo? How are you making that work with the girls? I am fascinated with your journey!
The BnB is 5 bedrooms and the girls each have their own room when we are there. The condo has bunk beds in the one bedroom and a fold out sleeper sofa in the living room – sleeps 4. It’s small but temporary. And we may flip it for a larger two bedroom that is vacation rentable for the long term. We’ll convert the BnB to our primary residence next summer when our 1031 exchange timeframe is satisfied.