Leasehold vs. Fee Simple: A Guide to Property Ownership Types in the U.S.

Understanding the difference between a leasehold and a fee simple property is critical before making a purchase. Fee simple ownership represents the most complete form of property ownership in the United States, granting the owner the land and everything on it. In contrast, a leasehold provides ownership of a structure for a set period, but not the land itself, which can lead to a significantly lower purchase price but comes with unique long-term considerations. This guide explains both ownership types to help you make an informed decision.

What is Fee Simple Ownership?

Fee simple is a legal term for the highest form of property ownership. When you own a property in fee simple, you have complete control over the land and any buildings on it, such as a house. This is the most common type of homeownership in the U.S. A key advantage is the ability to build equity; as the property appreciates in value, the owner retains all profit upon sale. However, the owner also bears the risk if the property value decreases.

For example, if you buy a house in Colorado Springs for $425,000 in fee simple, you own that property outright.

How Does a Leasehold Property Work?

A leasehold is distinctly different. It grants someone, known as the lessee, ownership of a home or building, but not the land it sits on. The land is owned by a freeholder (the fee simple owner of the land), to whom the lessee pays a recurring ground rent for the right to use the land for a predetermined term, often decades long. Leasehold properties are typically cheaper upfront than comparable fee simple properties because the lessee does not own the underlying land and has a temporary ownership interest.

This arrangement is more common in specific markets, including Hawaii, Florida, and New York.

Is a Leasehold the Same as Renting?

While there are similarities, a leasehold is not standard renting. A traditional renter signs a short-term lease (e.g., 12 months) and pays monthly rent without an upfront purchase cost. A leasehold, however, requires a substantial initial purchase price to acquire the structure, plus ongoing ground rent payments. The leaseholder has more control, typically allowing renovations without landlord permission. The commitment is also much longer, with terms often lasting 25 to 99 years. When the lease term expires, ownership of the structure reverts to the landowner in a process called reversion, unless a new agreement is negotiated.

What Are the Pros and Cons of a Leasehold?

Based on our experience assessment, leaseholds present a mix of advantages and challenges.

Potential Advantages:

• Lower Entry Cost: The initial purchase price is often substantially lower, providing access to desirable locations.
• Control Over the Structure: Unlike a renter, you can usually remodel and alter the home.

Key Considerations:

• No Land Equity: You do not build equity in the land, which is a primary driver of long-term real estate wealth.
• Depreciating Asset: The value of the leasehold decreases as the lease term shortens, making it harder to sell.
• Ongoing Costs: Ground rent and potential maintenance fees are recurring expenses.
• Financing Challenges: Securing a mortgage for a leasehold, especially one with a short term, can be more difficult.

For instance, a leasehold condo in Honolulu might list for $200,000, while a similar fee simple unit costs $400,000. The leasehold buyer must also pay monthly lease rent and may face challenges selling the property as the 10-year term progresses.

Should You Buy a Leasehold Property?

There is no universal answer, as the decision depends heavily on your financial goals and lifestyle. A leasehold might be a practical choice for someone seeking long-term stability in a specific location without the high initial cost of fee simple ownership. However, it is generally not ideal for those seeking a long-term investment to build wealth through equity.

Before considering a leasehold, it is essential to:

• Review the lease term length remaining.
• Understand all obligations, including ground rent amount and escalation clauses.
• Consult with a local real estate agent who has experience with these transactions.
• Get pre-qualified with a lender to understand specific financing options for leasehold properties.

Ultimately, while a lower price tag can be attractive, understanding the long-term implications of a leasehold is crucial for making a sound financial decision.