Defining what you want to achieve in home ownership is always essential, but particularly with leasehold, says agent Deb Stellingwerff
With Vancouver’s scorching home prices not looking like they are cooling down any time soon, many people may be turning to the seemingly more affordable option of a leasehold home. So when – if ever – is a buying a leasehold a good move?
As with any home purchase, it’s all about defining what you want to achieve out of home ownership, says Vancouver REALTOR® Deborah Stellingwerff.
A leasehold home, she explains, is where you own the home but not the land it stands on (or share of the land, in the case of a strata unit). That makes leasehold units more affordable than freehold homes as much of the cost of homes is in the land. But it also means that the landowner charges rent for the land and, even though many leases are pre-paid, the cost of renewing that lease could potentially be extremely onerous.
Answering a listener question on the latest Real Estate Therapist show on Roundhouse Radio, about whether she recommends buying a leasehold home on False Creek as an affordable option, Stellingwerff replies, “What are your motivations?”
She adds, “If it’s purely about lifestyle, you want to have that great location, a waterfront home that you wouldn’t otherwise be able to afford, then maybe leasehold is right for you.
“But if you’re, say, a young couple getting married, maybe there are kids in the future, if you buy a leasehold, you don’t have a legacy to pass on to them.”
Stellingwerff adds that leasehold homes will not appreciate in value like freehold homes. “It’s land that’s going up in value, that’s what’s driving the market. Recently, we have seen leasehold homes see a lift in value, as a side-effect of what’s going on in the freehold market, there’s a demand for places to live. But you’re not going to see the same kind of lift over time in a leasehold – it’s a depreciating asset.”
She points out that the length of the existing lease is also crucial. “With many of the False Creek properties, their lease is up in 20 or so years. No lender is going to offer you a mortgage of more than a 10-year amortization, because there’s so much uncertainty over what’s going to happen when the lease comes up, as the landlord can raise the rent. The land value will have appreciated significantly so that will likely be reflected [in the increased rent].”
She says, “A leasehold home can seem like a good option, but when things seem too good to be true, they usually are. There are a lot of things behind the scenes that you don’t know about.”
However, Stellingwerff says that leasehold can work for some people. “If you can handle a short amortization, and lifestyle is the most important thing, and you don’t care about having increased value in your investment at the end of the time you’re living there – then maybe it’s a viable option for you… There are some leaseholds, like some in North Vancouver on First Nations reserve land, that are much longer leases – and then lenders have no problem with it.
But Stellingwerff adds, “But if your motivation is to grow your equity, to have more than you started with at the end of your life, if you’re relying on real estate and your home equity for your retirement, then leasehold is not for you.”