If you’re shopping for a condo in Miami or a property in NYC, you might come across a great deal, only to see “leasehold property” in the fine print. What exactly does that mean? And more importantly, is it a smart investment or a financial headache waiting to happen? In this Redfin article, we break it down so you can decide whether a leasehold property is a smart move or a potential pitfall.
What is a leasehold property?
A leasehold property means you own the building but not the land it sits on. Instead, you lease the land from the freeholder (landowner) for a set period, which could be anything from a few decades to 99 years or more. When the lease runs out, ownership of the property typically reverts back to the landowner, unless you negotiate an extension (which usually comes at a cost).
This is different from fee simple ownership (or “freehold” in some places), where you own both the land and the building outright—forever.
How leasehold properties work
A leasehold property works similarly to renting, but with longer-term implications. When you purchase a leasehold property, you own the physical structure—whether it’s a house, condo, or apartment—but not the land it sits on. Instead, you enter into a long-term lease agreement with the landowner (known as the freeholder), granting you (the leaseholder) the right to use the land for a fixed period. These leases can last anywhere from a few decades to over a century, but once the term expires, ownership of the property typically reverts to the freeholder unless an extension is negotiated.
Leasehold ownership comes with additional costs and obligations. Here’s what you need to know:
- Lease term & expiration: The remaining length of the lease significantly impacts a property’s value. Leases with fewer than 30 years left can be difficult to finance and may be expensive to extend.
- Ground rent: Leaseholders typically pay an annual ground rent to the freeholder. Some leases have fixed ground rent, while others include escalation clauses that increase costs over time.
- Maintenance fees & service charges: If the property is part of a condominium or co-op, leaseholders may be responsible for additional fees to cover shared amenities, building upkeep, or management costs.
- Restrictions & permissions: Lease agreements often include limitations on renovations, renting out the property, and sometimes pet ownership. Any major modifications usually require the freeholder’s approval.
- Lease extensions & buyouts: As a lease nears expiration, extending it can be costly. Some leaseholders may have the option to buy the freehold, converting their property to fee simple ownership, but this process is often complex and expensive.
Where can you find leasehold properties?
Leasehold properties are most commonly found in areas where land ownership is highly concentrated, and property values are steep. Instead of selling land outright, landowners in these regions lease it to property buyers, allowing them to purchase homes or apartments while retaining ownership of the land.
Hawaii
Many residential properties in Hawaii, especially in Honolulu, operate on leasehold arrangements. Much of the land is controlled by large estates, trusts, and government entities that lease parcels rather than sell them outright.
New York City
Some co-ops and condos, particularly in Manhattan, function under leasehold agreements where the building sits on leased land rather than land owned by residents.
Miami and other coastal cities
High-value waterfront developments, particularly in Miami, occasionally operate under leasehold structures, especially when public or institutional landowners are involved.
Pros of buying a leasehold property
Why would anyone buy a home they don’t technically own forever? Here are a few reasons:
- Lower purchase price: Leasehold properties typically cost less upfront than their fee simple counterparts, making them more affordable.
- Prime locations: Many leasehold properties are in desirable urban or waterfront locations where freehold properties might be scarce or prohibitively expensive.
- Less responsibility for land upkeep: Since you don’t own the land, major infrastructure repairs may fall on the landowner, not you.
Cons of buying a leasehold property
Of course, leasehold properties also come with some drawbacks:
- Ongoing costs: Ground rent, maintenance fees, and potential lease renewal costs can add up.
- Limited control of the property: You may have restrictions on how you can use or modify the property, depending on lease terms.
- Financing challenges: Some lenders hesitate to issue mortgages on leasehold properties, particularly if the lease term is short.
Should you buy a leasehold property? Key questions to ask yourself
Buying a leasehold property comes with unique costs and responsibilities, so it’s important to consider your long-term plans and financial situation. If you want full ownership and flexibility, a leasehold may not be the best fit. But if you understand the terms and potential expenses, it can still be a worthwhile investment, just be sure to do your research and seek expert advice. Here are key questions to help you decide:
What’s the remaining lease term?
How many years are left on the lease? Properties with shorter lease terms (under 30 years) can be harder to finance and may lose value as the lease nears expiration.
What are the ongoing costs?
What ground rent and service charges will I be responsible for? Are these costs likely to increase over time? Be sure to factor in the potential for rising fees, especially in properties with shared amenities like condos or homes in an HOA.
Are there restrictions on the property?
What limitations are in place regarding renovations, subletting, or having pets? Understand the leaseholder’s responsibilities and whether these restrictions might affect your plans for the property.
Will I need to extend the lease or buy the freehold?
If I plan to stay long-term, what will it cost to extend the lease or buy the freehold? These processes can be expensive and complex, so it’s essential to understand the costs and time involved.
How does the market view leasehold properties in this area?
Are leasehold properties common or desirable in the area I’m considering? If they’re harder to sell, that might affect your long-term investment value.
FAQs about leasehold properties
Can I sell a leasehold property?
Yes, but the remaining lease length affects its value and marketability. Properties with shorter leases (under 80 years) can be harder to sell and finance, as buyers may face high costs to extend the lease.
What happens when a lease runs out?
Unless extended, ownership of the property typically reverts to the freeholder. In some cases, leaseholders may have the right to extend the lease or purchase the freehold, but this can be costly.
Are leasehold properties harder to finance?
Lenders often require a lease to have at least 70–80 years remaining for mortgage approval. Shorter leases may limit financing options or require a higher down payment.
Can a freeholder increase my fees?
Yes, depending on the lease terms. Ground rent, service charges, and other fees can rise over time, especially if escalation clauses are in place. Always review the lease agreement carefully.
What’s the difference between leasehold and co-op ownership?
In a leasehold, you own the property structure but lease the land. In a co-op, you don’t own your unit outright but hold shares in a corporation that owns the building, with residency rights governed by a proprietary lease.
Can I buy the freehold?
In some cases, yes. Leaseholders may have the right to purchase the freehold through a process called collective enfranchisement (for flats) or leasehold enfranchisement (for houses), but costs and eligibility rules vary.