THE LOWDOWN ON LEASEHOLDS
So you’re in the market for an apartment. Something in the West End, perhaps. Maybe something with a view. You’ve done your research; you know roughly what it’s going to cost you. But then, you come across a listing that’s well under market value. If this is the case, you've likely stumbled upon a leasehold agreement property.
What exactly is a leasehold agreement, you might ask? A leasehold agreement grants you the exclusive rights to occupy a property for a limited period of time (typically between 50 and 99 years from the onset). In Vancouver, these properties are most commonly owned by the City of Vancouver, but are also owned by the federal government, universities, Indian Bands and even private individuals. So when you are purchasing a lease, you are buying the rights to the property for the period (or remaining period) of the lease agreement as well as the structure and any common property in question.
In Vancouver, you can most often find leasehold apartments sprinkled around the West End and False Creek, and leasehold houses and duplexes on Vancouver’s Westside in Point Grey and on the University Endowment Lands. To the right buyer, snagging a leasehold property in such an expensive locale can be an awesome deal.
While it’s true that a leasehold purchase may not exactly equate to the classic dream of home ownership, that doesn’t mean it can’t be a great opportunity. Leasehold properties tend to be located in desirable areas, and are almost always cheaper than purchasing the freehold equivalent. Given the lower price point, you might be able to buy into a better lifestyle than you could otherwise afford – this could mean living in a more popular area, being closer to amenities and attractions that are important to you, or maybe buying a larger or nicer unit. For obvious reasons, leasehold properties don’t generally make for the best purchase if we are speaking strictly in investment terms, but this doesn’t necessarily mean that they can’t make you money over time.
Allow us to explain. Leasehold properties hold intrinsic value in their rent equivalents. Given that buying a leasehold property gives you the right to occupy the unit in today’s dollars, the value of this rent equivalent will increase over time as all things do (although at a lesser rate than a freehold property would).
The important thing to remember is that as the lease gets closer to its expiry date, the market value of the property as a whole will diminish. This is because of the uncertainty for leasehold owners when a lease expires. If a lease agreement is renewed, it will be done in current-day dollars, which will almost certainly represent an increase in price. If the lease is not renewed, you will be paid fair market value for your asset, but you will have to move on and out to somewhere else.
There can also be uncertainty with regards to financing. Banks will generally ask for a hefty down payment (25-30%) when dealing with a leasehold property. Lenders also use the expiry date of a lease when determining the amortization period for a loan. So, the fewer years left on your loan, the shorter the amortization period will be. For this reason, leasehold properties tend to be popular with individuals who have already built up equity elsewhere.
All this talk throwing your head for a loop? The most important thing to consider when buying a leasehold property is the amount of time left on the lease when you purchase it, relative to the amount of time that you intend to hold the property for. If you’re planning on selling the property in the future, make sure that there are at least 25-odd years left on your lease by the time that you do. This will allow the property to be reasonably marketable to another buyer. If you're planning on living in the property, ask yourself if you’ll be willing to pay an increased price or to move on and out when the lease eventually expires.
Leasehold properties aren’t for everyone. Like anything, you need to have a long-term plan. But if you value lifestyle factors and can find a property with a timeline to suit your needs, a leasehold property could be the deal of a lifetime!
Check out Nels' leasehold listing below:
MODERN. WATERFRONT. LUXURY
Contact Nels at 604-767-9534 or email@example.com
Harbour Terrace, one of False Creek’s premier buildings! This large 925 sq ft 1-bedroom & den/solarium overlooks a beautiful treed vista. Everything is original since the building was completed in 1983. With a great price this would make the perfect renovation project, so bring your creative ideas! Plus, you’ll never be bored with Granville Island as your backyard. You’ll enjoy easy access to excellent restaurants, boutiques, galleries, public transit and more. City of Vancouver prepaid lease until 2040. For more information about this property click here.