Leasehold vs. Freehold: What's the Difference?

To understand leaseholds, it's essential to distinguish them from freehold properties.

• Freehold (or Fee Simple): You own both the property and the land it sits on indefinitely.‍
• Leasehold: You own the building or home for a specific period (the "lease term"), but someone else owns the land. You lease the land from them, often for decades (30, 60, or even 99 years).

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A Journey Through Leasehold History

Leasehold property ownership isn't a new concept. It has roots in historical land ownership patterns and has been used in various forms across the globe.

‍England: In England, the leasehold system evolved as a way for people to access and utilize land without the need to purchase it outright. Today, England has approximately 4.98 million leasehold homes, accounting for roughly 20% of its housing stock. The majority of flats (condos) in England are sold as leaseholds. This empowered many to have access to housing.

Hong Kong: Hong Kong offers an even more dramatic example. Virtually all land in Hong Kong is leasehold, with the government leasing land to developers and homeowners for terms of 75 or 99 years. This system has allowed Hong Kong to thrive, even with its limited land.

‍Hawaii: In the United States, leaseholds are less common but have a significant presence in certain areas like Hawaii. In the 19th century, land was reorganized, leading to large landowners leasing out land to residents and businesses. By the mid-20th century, over half of Hawaiian land was owned by just 17 major landholders. While reforms have allowed some leasehold homeowners to purchase the land, leasehold properties remain a notable part of Hawaii’s market. In Hawaii, a leasehold property might sell for $250K to $600K, whereas a similar fee simple (land-owning) property would be around $800K to over a million. This empowered residents to access housing in an otherwise expensive market.

Native American Lands: On many tribal reservations in the U.S., land is held in trust for the tribe and cannot be sold to individuals. Instead, tribes use long-term ground leases (often 50-year) to allow members to use land for homes or businesses. This empowers tribal members to achieve homeownership where it would otherwise be impossible.

Stanford University: Stanford University provides another interesting example. The university's founders mandated that campus lands could never be sold. Instead, Stanford leases parcels to faculty and staff for housing, creating a stable community of campus homeowners. This empowered academics to live locally in an expensive market.

Land-Lease Communities: Throughout the U.S., land-lease communities, such as manufactured home parks and retirement communities, have provided an affordable path to homeownership for decades. In these communities, individuals own their home but rent the lot it sits on. This empowers people to own a home without the hefty price tag of land.

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The Benefits of Leaseholds

These historical examples highlight the key reasons why leaseholds have been used throughout history:

1. Lower Purchase Prices: Because you're not buying the land, the upfront price of a leasehold home is significantly lower than a comparable freehold property.
2. Smaller Down Payments: A lower purchase price translates to a smaller down payment.
3. Lower Monthly Payments: With a smaller mortgage (since it only covers the house), your monthly principal-and-interest payment is lower. You will pay ground rent for the land, but even with that factored in, the total monthly outlay can be lower than a traditional mortgage in high-cost areas.
4. Access to Better Locations: Leaseholds can provide a way to live in otherwise unattainable neighborhoods.

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The Rise of Modern Leaseholds

Companies are now reinventing the leasehold model for today's homebuyers, making it possible to use this affordability tool everywhere. These companies purchase the land, so you don't have to. You buy the home and lease the land from them for a long period. And some companies, like Jubilee, even offer the flexibility to buy out the land at any time. This allows buyers to enter the housing market with a smaller down payment and lower monthly costs, while still having the flexibility of traditional homeownership.

So if leaseholds are a new concept you haven’t heard of before, remember that they aren't a new or untested concept. They have a long history and continue to play a role in today's housing market.