Leasehold Property: What It Is, Pros and Cons, and Where to Find Them in the US

A leasehold property is a long-term land lease arrangement where you own the building but not the land it sits on, offering a lower-cost path to homeownership that is common in Hawaii, Florida, and New York. However, the significant drawback is that you do not build equity in the land, and the property reverts to the landowner at the end of the lease term, which can last from 40 to 120 years. This guide explains how leaseholds work and who might benefit from this unique form of ownership.

What is a Leasehold Property?

A leasehold property, also known as a freehold lease, is an arrangement where you purchase the right to use a property and the land it occupies for a fixed, long-term period. Crucially, you own the physical structure (e.g., the house or condo) but not the underlying land. The land is owned by a freeholder (or lessor). Upon the lease's expiration, ownership of the building and all improvements typically reverts to the landowner, unless a new lease is negotiated. This differs fundamentally from Fee Simple ownership, the most common type in the U.S., which grants perpetual and complete ownership of both the structure and the land.

How Does a Leasehold Agreement Work?

A leasehold agreement functions like a long-term rental. After making a down payment—which is often significantly lower than the standard 20% required for a traditional mortgage—the leaseholder makes monthly payments, often called ground rent, to the freeholder.

• Long-Term Commitment: Lease terms are typically a minimum of 40 years and can extend beyond 100 years.
• Control and Improvements: Unlike a standard tenant, a leaseholder usually has the right to renovate, make additions, and even build new structures on the land.
• Transferability: You can sell your leasehold interest to another party without the freeholder's permission. The value of this interest is heavily influenced by the number of years remaining on the lease.

Leasehold vs. Standard Rental: What's the Difference?

While both involve paying to occupy a property, the terms are vastly different.

As Seamus Nally, CEO of TurboTenant, explains, "On the contrary, leasehold agreements are generally much longer, and the tenant essentially purchases the right to occupy and use the property for a long stretch of time."

What Are the Advantages of a Leasehold?

Leaseholds can be an attractive option for specific buyers due to several key benefits:

• Lower Entry Cost: The initial down payment is considerably lower, making it more accessible.
• Potential for Rental Income: If you purchase a condo, you can often rent it out, potentially generating a steady income stream. As Hawaii real estate expert Powell Berger notes, "The cost of owning the unit is low, and the rental income it produces can generate a good return."
• Fixed Housing Costs: For seniors on a fixed income, a long-term lease can lock in housing costs for decades, unlike short-term rentals where rent can increase annually.

What Are the Major Disadvantages?

The primary cons are significant and require careful consideration:

• No Land Equity: The most significant risk is that you do not build equity in the land, which is a core component of traditional homeownership.
• Depreciating Asset: As the lease term shortens, the value of your leasehold interest generally decreases, making it harder to sell.
• Reversion Risk: At the end of the lease, you lose all rights to the property and any improvements you've made.
• Financing Challenges: Securing a mortgage for a leasehold property with a short term (e.g., less than 50 years) can be difficult.

Where Are Leasehold Properties Found in the US?

Leaseholds are rare in most of the United States but are more common in specific markets where land is scarce or historically unique. The primary states where you may encounter them are:

• Hawaii: Particularly in Maui and other islands, where many condo developments from the 1970s-80s were built on leasehold land. Some of these leases are now nearing expiration.
• Florida: Found in certain beachfront and high-value land communities.
• New York: Primarily in specialized situations, such as with some cooperative apartments.

Before considering a leasehold property, it is critical to consult with a real estate professional experienced in these unique transactions. They can help you understand the specific terms of the lease, the reputation of the freeholder, and the long-term financial implications. For most seeking to build wealth through real estate, a fee-simple purchase remains the standard, but for a select few, a leasehold can provide a viable path to a specific lifestyle.