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If you have access to $80K then use that as a down payment on a few simple condo
Well, we are worried if we get the FS place we saw or the nicer one bedroom LH unit we looked at, if there is too much of a vacancy we will have difficulty with the payments. With a smaller unit, even if there are slow periods, we are still fine.
I like your advice though, as we liked the bigger one bedroom unit better anyway!
I've seen situations where a leasehold was sold (with option to buy the fee) for way less than a comparable fee simple unit, probably because most buyers are automatically turned off by the lease & lenders are leery of LH properties in general (this was also during the recession). Imaginary example: $220k LH, $40k to purchase fee, FS property in the building $300k. This situation not typical though.
Personally, I think it only makes sense if the price disparity between it and a FS property is large enough that it makes sense to operate it as a rental or live in it, even factoring in the lease renegotiation/termination at end of the LH term. Or if youre a retiree or something, want to plunk down a much smaller amount of money to buy the LH condo, then only deal with the lease fee. You don't care what happens when the lease ends because you won't be around to worry about it.
The only leasehold condo building worth consideration is the one which landowner is City & County. Due to political pressure, C&C will not sell the fee at an exorbitant price when it makes the offer.
Well, we are worried if we get the FS place we saw or the nicer one bedroom LH unit we looked at, if there is too much of a vacancy we will have difficulty with the payments. With a smaller unit, even if there are slow periods, we are still fine.
I like your advice though, as we liked the bigger one bedroom unit better anyway!
I'm typically opposed to buying leasehold properties. However, in limited circumstances for a few people, it may be ok.
Hypothetical example: Let's say you are 62 and recently retired. Don't have a large income but you're comfortable. You want a place to snow bird and can't handle the risk of a mortgage payment. Maybe then your leash old scenario is ok. You spend $80,000 cash and hope the rent over a year covers your hoa fee, lease fee, taxes, insurance, etc. at the end of 20 years, you are 82 and probably in need of a different form of housing.
However, if you are younger, you are just throwing away $80,000 that you could invest in something else and create a bigger retirement income in the future.
Also remember it won't be easy to get your money back in the future. So 5-yrs down the line if you are tired of Oahu, or have a financial emergency, good luck getting your money out of the unit.
But I do understand the price of a decent fee simple unit in Waikiki has risen above the reach for many people today.
Some fee simple buildings have the HOA buying the fee for the units (I think Discovery Bay and Kailia may be two of those). That's also a little better situation I think.
How much is your unit HOA fee on top of your lease fee ?
Going back to leasehold vs fee simple, we are almost ready to buy a leasehold property in Waikiki (it's already legally zoned for short term rentals) but after reading this thread I'm second guessing.
We can get for around $80k with almost 20 years left on lease and around $250 lease rent/mo. After running the numbers, we would need to rent it out 2 weeks per month to break even. We have a HELOC so will be able to make a cash offer. We figure when the lease is up we shall still have made a profit similar to if we sold it for a profit, with no need to sell it if the fee owner takes it back, and will have had a place to stay on vacation a few times per year as we love Oahu. I feel like as a primary residence I would never want to buy a leasehold, but this would be vacation home/investment property.
Since many of you seem very well informed (and more experienced than us), do you still think a leasehold would be a bad idea in this instance?
Check this: Most conventional loans will not loan unless there is the length of loan plus 10 years left on the lease. This could mess you up if you needed to sell.
At the expiration it could increase substantially.
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Going back to leasehold vs fee simple, we are almost ready to buy a leasehold property in Waikiki (it's already legally zoned for short term rentals) but after reading this thread I'm second guessing.
We can get for around $80k with almost 20 years left on lease and around $250 lease rent/mo. After running the numbers, we would need to rent it out 2 weeks per month to break even. We have a HELOC so will be able to make a cash offer. We figure when the lease is up we shall still have made a profit similar to if we sold it for a profit, with no need to sell it if the fee owner takes it back, and will have had a place to stay on vacation a few times per year as we love Oahu. I feel like as a primary residence I would never want to buy a leasehold, but this would be vacation home/investment property.
Since many of you seem very well informed (and more experienced than us), do you still think a leasehold would be a bad idea in this instance?
How healthy are the reserves for the building? Did you review the condo docs? Given the price and remaining term, I'm assuming this is a small studio with maintenance fees at about $450-$500/mo incl all utilities. Maintenance fee increases (as a percentage of the fee) in older LH buildings will escalate (disproportionately) over time as LH "owners" are less likely to make needed repairs or invest in improvements as they will most likely not be owning the property beyond the lease termination date. Addressing deferred maintenance problems is costly. The maintenance fee could reasonably be $800++ in 10 years. You also risk paying significant assessments if reserves are not sufficient to service expiring building components. These assessments can be especially poignant because they will represent a large percentage of the initial acquisition cost. The assessment will be identical if it is LH of fee.
If they are zoned legal for short term rentals and the condo is used short term, the taxes will be nearly quadruple the residential rate. Listings on the MLS show the taxes paid by the current owner. Even if the property is zoned for hotel/resort, if the specific use (time of listing) is residential they can pay the lower rate. Since you will be leasing it as a vacation rental you could be paying nearly quadruple the previous owner's rate. Realtors rarely disclose this to buyers.
Another downside to LH ownership many are not aware of is the LH owner pays for the tax on the building AND the land despite only owning the building. You may pay $80K for the unit but you could be responsible for commercial property taxes on a $200K+ property. You also cannot contest the city's assessment of the land (and building) because they assess on the entire condo as FS. Complaining will do nothing. Expect to pay about $200/mo in property taxes ($190K city valuation).
Not sure if the property offers on-site management, but you should factor an occupancy rate of about 70% with 25% management fee (private) and 50% if management is provided on-site (e.g. hotel operation). Tourism has been red hot lately breaking records year after year. It's more likely than not that it will cool down soon.
Are you factoring in refurbishing of the interior items like furniture, flooring, appliances, cabinets, etc? ~20 years is a way to go... you won't be getting much income (compared to your competition) if your unit is sporting 15 year old carpet and a 20" LCD TV. Units that perform well are always clean and updated.
I'm assuming the lease ends in 2035 with no increases in the interim (fixed to term). If there are renegotiation dates in the LH docs, there is a risk the LH rent will increase.
Thank you all for your posts, you are really great!
We did look at Discovery Bay and loved the place, but they only allow 30 day rentals, and that scared us away. What a great location. And in a perfect world we'd love the Ilikai. I've heard it's the best investment property on Oahu, but it's way out of our price range.
The Ilikai? I have to imagine considering the age of the building the maintenance fees are very high and I don't see what is particularly appealing about it
HOA fees at the Ilikai are $396 but that doesn't include electricity. I guess I like it in a selfish way - we love the location and would use it 4-5 times per year. I looked on vrbo to look at rental occupancy rates (if there's a better way I'm sure someone will let me know) and they were full at least 3 weeks/month. But whatever, they are priced too high at $800k for an ocean front and $550-600k for facing the street. I still like them though. In a perfect world I'd live in a house in Kailua but...
it's like owning a boat. utter money pit and totally not worth it unless you use it all the time, and even then it's a financial sink hole. Instead of owning the boat (or the condo), just rent it, have a ton of fun, and at the end of the day, hand the keys back to the owner. You're only on the hook for the $200/day instead of facing a much larger losing investment.
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