When you own a leasehold property, you become the owner of the building, not the land in which the building stands. An annual payment must be paid to the leaseholder as the ground rent. The duration of such a property may be 30, 60, 99 or 999 years. Once the duration expires, the ownership of the property reverts back to the landholder. On buying a leasehold property, one must acquire the knowledge of the number of years the property has been on lease, as it will have a huge influence on the value of the property.A leasehold property has a lot of advantages and disadvantages for both the tenant and the landlord. So here, we list you the advantages and disadvantages of a leasehold property in order to help you decide wisely.
Advantages of Leasehold Property
The initial cost of investment is reduced
In order to construct a building, one need to acquire the ownership of the land and must start the building process. Hence, this significantly raises the overall cost and also the upfront cost of the project. Now, if one enters into a leasehold agreement with the land owner, it will help him avoid the upfront cost and also reduces the overall cost of the project.
Cheaper to buy – tenant advantage
If you are planning to buy an already constructed property, then you must better go for a leasehold property. The benefit is obvious, as you are not going to buy the land, the property becomes cheap automatically.
Tax deduction – tenant advantage
This is another benefit associated with buying such property.One need not pay tax to federal and state income taxes, if you do not hold the ownership of the land. However, if you had the ownership of the land, the extra burden of paying the rental payment tax would have been upon you. So, owning a leasehold property helps in tax deduction.
Less responsibility – tenant advantage
The responsibility of the property rests upon the developer of the project and the tenant can benefit from not having to care too much about the property. The tenant can also feel safe by acquiring a lease property. The tenant uses it for only a certain number of years and then the responsibility of the property reverts back to the landlord.
Tax reduction – landlord advantage
If the owner of the property sells it upright, he / she needs to calculate the capital gain and pay taxes on that gain for the year in which the property was sold. This helps the land owner to avoid the large payable sum of tax. The landlord thus benefits from it and escapes by paying only an ordinary amount of tax.
Ownership retention – landlord advantage
The landlord retains the ownership of the property or a land if the lease expires. This is one big benefit for the landlord, as the landlord can take the advantage of the situation, if the tenant really wants the property on lease for another period.
The tenant will not be able to make full use of the property. The landlord will keep on imposing restrictions on him and will make the tenant feel that the property belongs to him. If the tenant wants to knock off the old building and construct a new one, he / she will need to enter a new leasehold agreement for that purpose. Some landlord does not even allow the tenant to own a pet in the building.
Hard to sell
If the leaseholder is trying to sell a leasehold property, the takers will not be many. In fact, it is impossible to sell a leasehold property, if the lease is nearing its end.
Need to pay premium
If the leaseholder wants to have a hold on the property for an extended period, ie., if the lease is nearing its end and the leaseholder wants to extend the lease period, then the landlord is in the position to demand more premium from the leaseholder. The longer the period of extension, the more the premium, the leaseholder needs to pay.
Hard to get loan
The leaseholder will have a very difficult time to get a loan for the leasehold property. The banks will perform an extensive background check on the property and still you won’t be guaranteed of the loan. The properties with very short lease period or the properties whose lease is nearing its end will not even get a loan.
The leaseholder has the burden of making regular payments to the landlord in the name of annual ground rent. Imagine you are the owner of the building, but still you are required to make a payment and it makes you feel like you are staying in a rented apartment.
As you do not own the property, you will be missing the long term benefits associated with the property. If the value of the land increases, the landlord will be the one who benefits from it. Further on leaving the property, you are responsible for bringing the property to its original state. This is the right of the landlord and you will be required to serve it for the landlord. The landlord may pay some of the maintenance expenses and get away with the extra pay, but you will be expected to pay for utility costs and internal maintenance, as well as repair work and has to bear the burden.
Thus it has both its advantages and disadvantages as listed above. If you happen to own a land, i.e., you are a landlord, putting a property on lease will definitely benefit you in many ways. However as a tenant, you must be careful in deciding whether to lease a property or not and need to collect whole lot of detail before acquiring the lease. But you surely do have a lot of benefits as well as a tenant trying to get a property on lease. Hope this helps you to decide on the type of property.