Have you ever dreamed of owning your own home in Hawaii? If you’ve browsed real estate listings in the Aloha State, you may have encountered a small detail that says: “Land Tenure: Leasehold.”
You’ll often see this note in listings for condos, especially those in and around Honolulu. The other thing you’ll notice is that these properties are significantly less expensive than comparable ones listed as “fee simple.”
Initially, you might think the low price is a typo. That’s not the case. When you agree to a leasehold arrangement, you’re getting something a little different than an outright sale. We’ll show you exactly what it means to enter into a leasehold agreement—and who this unusual situation might be right for.
Understanding Leasehold vs. Fee Simple Property Arrangements
Hawaii is one of the very few states in which you’ll see leasehold arrangements. You can also spot them in New York or Florida. Because they’re not as common, you might not understand what they entail—and how they differ from properties listed as “fee simple.”
We’ll start by explaining fee simple arrangements, because that’s one you’re likely already familiar with.
If you’re new to leasehold properties, you might wonder: Why would anyone enter into an agreement like this? Isn’t it easier to buy a fee simple property?Let’s talk about it.
The Pros and Cons of Leasehold Properties
As you may have guessed, leasehold properties have their upsides and downsides when compared to fee simple arrangements. Below, we’ll give you some insight into why you might go for a leasehold—and why not.
PRO: Leasehold Properties Are Less ExpensiveIf you've looked at Hawaii's real estate market lately, you'll notice that prices are sky high. In fact, they're too high for some people to get into the market at all. However, a leasehold arrangement allows a person to secure a long-term abode in Hawaii for a significantly lower price.
For example, compare these two listings in Honolulu:
Leasehold Condo – 3 bedrooms, 2.5 bathrooms, 3,510 ft² – Listed at $305,000
Fee Simple Condo – 2 bedrooms, 2 bathrooms, 1,525 ft² – Listed at $760,000
Now, clearly, at the end of the day, the person with the fee simple arrangement is building equity in something they own outright. However, for the right person, this might not matter.
Con: Tougher to Get FinancingIf you're planning to get a loan to finance your leasehold, it can be more challenging than a traditional mortgage.
For starters, if your lease is less than 30 years, you won’t be able to secure a classic 30-year mortgage. Additionally, if your leasehold agreement contains a renegotiation clause, it might mean that the lender uses much higher estimated numbers to qualify you for financing—or disqualify you.
Pro: Leaseholds Can Be the Right Fit for Certain Types of PeopleThose who want to enjoy extended time in Hawaii for less. A leasehold property is ultimately cheaper than a fee simple property. It’s also significantly less expensive than a month in a hotel or a short-term vacation rental. If you’re someone who loves spending a few months at a time in Hawaii, a leasehold might be the right move, as long as you’re not interested in the equity that comes with fee simple ownership.
For example, people in the following categories might benefit from a leasehold:
Investors who can take advantage of Hawaii’s strong vacation rental market and use their leasehold property to generate monthly cash flow for a set period.
Seniors who are enjoying the golden years—and are not as concerned about building equity. They may find it easier to afford a place in Hawaii under a leasehold agreement, especially if the monthly lease rent stays low over the course of ~20 years.
Con: Fewer Tax AdvantagesDespite some of the financial advantages, it's worth noting that leasehold properties with terms of fewer than 30 years do not qualify as real estate under federal tax law.
As a result, you won’t be able to use this type of leasehold to defer capital gains taxes under a 1031 exchange. If the tax advantages of buying a property are important to you, leaseholds aren’t the right choice.
Finally, you might be curious why Hawaii, of all places, is a hotbed of leasehold properties. The answer lies in the history of the Hawaiian Islands.
Why Does Hawaii Have So Much Leasehold Property?
Leaseholds find their origins in two historical events: The Great Mahele in 1848, which was the start of private land ownership in Hawaii, and the Kuleana Act in 1850, which established fee simple titles.
It’s important to understand that, prior to European arrivals, private land ownership in Hawaii didn’t exist. Instead, the King was considered the “sovereign owner” of the land, which was controlled by the high chiefs, and tended to by the people. Land was divided in such a way that everyone had access to the resources they needed. You may have heard of the division known as the ahupuaa, which was supervised by an alii (high chief).i
In 1848, the Great Mahele was initiated by King Kamehameha III. It divided land into three categories—crown lands, owned by the king; government lands; and konohiki lands, divided amongst the chiefs. After the Kuleana Act, a significant amount of land in Hawaii ended up in the hands of European missionaries and trusts, including the Queen Emma Foundation, Liliuokalani Trust, the James Campbell Company, and Bishop Estates. Many of the trusts held on to these lands and turned them into sources of long-term income as leasehold properties.ii
And, for all the reasons listed above, both owners and leasehold tenants found the terms favorable, so the leasehold lives on in Hawaii.
Is a Leasehold Agreement Right for You?
For some people, a leasehold offers the rare opportunity to enjoy a long-term home in paradise they might not be able to afford otherwise. Others might not think the downsides are worth it and prefer to a fee simple property. Continue to explore the pros and cons from your side, as well as the available listings, and you’ll discover the right option for you. (And, don’t forget, good old renting is also a possibility in Hawaii!)
Are you considering making Hawaii your long-term home? We’d be happy to help! Whether you’re moving into a studio or a five-bedroom house, we have options for moves of all sizes, plus teams on all four major islands. Just reach out to us and get started with a free quote.
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