Choosing between the two types of land tenure, the fee simple vs. leasehold ownership, would affect your real estate’s value. It’s critical to differentiate them if you’re looking to buy a property in a leasehold state like New York, Hawaii, or Florida.
Fee simple is the most commonly chosen real estate ownership, making it more familiar to people. In contrast, leasehold ownership only applies to select states. Below, we’ll discuss leasehold ownership, fee simple ownership, and useful facts about leasehold.
What Is the Difference Between Fee Simple and Leasehold?
It’s sometimes referred to as fee simple absolute or freehold since it’s the most straightforward and complete form of real estate ownership.
If you’re a fee simple buyer, you’ll have the title to the property, including the land and future improvements to said land. You’ll end up purchasing the entire property.
No time limit exists on a fee simple buyer’s ownership of the land, and he could do whatever he wants with it: sell it, trade it, give it to someone, lease it, or pass it on upon his death.
Since fee simple is the most familiar form of ownership, this is what most people choose.
On the other hand, a leasehold involves a lessor (property owner) and a lessee. A leasehold interest is formed when a lessor, the fee simple landowner, makes an agreement or ground contract with a lessee, who pays for the use of the real property with his lease payment.
The lessee has ownership over the improvements to the land, but at the end of the agreement, the property goes back to the lessor- unless a new lease is agreed upon.
If the leasehold real estate is passed on to the new owner, land use is limited to the remaining years the original lease covered. At the end of the pre-determined period of time, the land returns to the lessor (also known as reversion).
Important Things to Know About Leasehold
The lease rent is the amount paid to the lessor for the use of their land.
The fixed period is the period wherein the lease rent is fixed.
The day the lease ends is called the expiration date.
Renegotiation date is the date where the renegotiation of the lease rent occurs.
When the lessee gives the property back to the lessor, that event is known as a reversion.
The terms of the reversion are known as surrender. It states what happens to the building or unit at the expiration date. Sometimes, the building gets to be the lessor’s property at the term lease expiration.
Leased fee interest
The leased fee interest is the amount a lessor is willing to accept to give up his fee simple ownership.
A lease term is the duration or length of the lease period. It can usually go from 55 years and above. You will have to know if there’s a right to extend stated in the terms.
The lease would have a formula for the new lease rate calculation to determine the increase in rent. It’s based on a percentage of the market value of the fee simple land at renegotiation.
Frequently Asked Questions
What’s the reason for me to buy leasehold property?
The luxury lifestyle can now be within your reach since it comes at a lower cost. With this setup, you’ll be paying a monthly lease rent that’s less than a typical mortgage payment.
Furthermore, if you don’t have heirs where you can pass your property, this option will end up the best for you. You can enjoy your retirement at a more affordable cost.
Should someone purchase a leasehold property if they’re worried about the investment return and risk?
In a fee simple ownership, the return on the initial investment would make the purchase worth it. An ideal scenario is for someone to get a property with the intention of using it as a vacation rental. However, there’s always a risk of reversion when the lease ends.; it’s up to the investor to take the risk. It’s still nice to consult a lawyer and investment manager if you want proper guidance.
Which Is the Right Choice?
The choice between fee simple and leasehold ultimately depends on personal preference. Many older people see the leasehold as a better option due to the limited amount of time they intend to enjoy the property.
To be sure about the entire process, we recommend consulting with an attorney who is knowledgeable about leasehold contracts.