Leasehold Condos

Leveraging, renting vs owning, making an investment or buying a home?
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milton
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Leasehold Condos

Post by milton » 15 Jan 2018 02:18

Anyone have positive or negative experiences with purchasing leasehold (as opposed to freehold) residential condos for investment purposes? In Victoria, 2bedroom 1bathroom freehold condos start from $380k. 2bedroom 1 bathroom leasehold condos start from $220k. At this price range, they both rent out for $1500/month. Strata fees + property tax for the freehold condos about $500/month. Strata fees + property tax for leasehold about $350/month. Leaseholds in town here have ~55 years remaining. While leaseholds don't appreciate as quick as freehold, this doesn't make much of a difference if it is a buy and hold. Any thoughts on whether leasehold is a good idea for income property?

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kcowan
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Re: Leasehold Condos

Post by kcowan » 15 Jan 2018 07:26

We have been in a leasehold since 1997. It is inherently cheaper than a comparable freehold. The main capital costs are all the mandatory maintenance items like copper plumbing replacement, building envelope expenses, and internal upgrades like flooring. Ours is on 99 year lease signed in 1966.

In 2015, we evaluated buying a freehold because we were facing patio and internal floor replacement, causing upheaval. We found the comparison was 6.1 versus 1.7 $ per sq.ft. per month. This is after the land had appreciated for 50 years!

So my conclusion is that your observations are correct. Just don't expect to see any returns on land value appreciation. That is often what investors count on for RE rentals. This still makes it a good investment for a place to live/rent out.
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Re: Leasehold Condos

Post by AltaRed » 15 Jan 2018 11:09

It is a debate almost everywhere including here in the Okanagan where there is a lot of leasehold on indigenous lands up and down the valley. The primary value in my opinion is 'lower cost entry' for young couples or young families wanting to put a decent roof over their heads, and/or seniors who downsize due to being cash flow poor (and house rich) and don't much care about the lease ticking away slowly over time for he 10-20 years they have left on this planet. In most cases, the lease has been pre-purchased when the property was built to avoid the burden of monthly lease costs, so a buyer coming in sees it very little differently than a freehold property.

I see it as a trade off between low cost entry (and thus lower mortgage) for a period of time and lower capital appreciation. I wouldn't purchase leasehold myself due to slower capital appreciation AND leasehold properties are much harder to sell due to hesitance from a large swath of potential buyers not wanting to purchase a leasehold property.
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Re: Leasehold Condos

Post by scomac » 15 Jan 2018 17:17

AltaRed wrote:
15 Jan 2018 11:09
It is a debate almost everywhere including here in the Okanagan where there is a lot of leasehold on indigenous lands up and down the valley. The primary value in my opinion is 'lower cost entry' for young couples or young families wanting to put a decent roof over their heads, and/or seniors who downsize due to being cash flow poor (and house rich) and don't much care about the lease ticking away slowly over time for he 10-20 years they have left on this planet. In most cases, the lease has been pre-purchased when the property was built to avoid the burden of monthly lease costs, so a buyer coming in sees it very little differently than a freehold property.

I see it as a trade off between low cost entry (and thus lower mortgage) for a period of time and lower capital appreciation. I wouldn't purchase leasehold myself due to slower capital appreciation AND leasehold properties are much harder to sell due to hesitance from a large swath of potential buyers not wanting to purchase a leasehold property.
The retirement living communities are certainly popular here in this part of Ontario. There are several that i know of in fairly close proximity to where we live. While capital appreciation will maybe less than a freehold property there doesn't seem to be any softness in demand as listed properties are scooped up quite quickly at established communities. I know that there is a waiting list for two of these such communities near me and in many cases the cost of the units isn't much less than you might expect to pay for a comparable single detached home in close proximity.
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AltaRed
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Re: Leasehold Condos

Post by AltaRed » 15 Jan 2018 17:29

Are we talking about the same thing? Condos, retirement community detached homes, etc. might all be strata, but is the land component held freehold (as in Ontario crown registered in the provincial land registry)? Or long lease leasehold (First Nations land which i believe the land registration is still managed by Ottawa)? Also, new construction on First Nations land does not incur GST/HST.

Many of our retirement communities are on First Nations land and thus are leasehold under long term, e.g. 99 year, leases. Those that are not have higher market prices.
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Re: Leasehold Condos

Post by Insomniac » 15 Jan 2018 18:30

Buyer beware!
https://www.theglobeandmail.com/real-es ... e23666733/

In the UK, properties on leased land is common. If the lease has less than 50 years or so left on it, you might not be able to get a mortgage. Renegotiating the lease, making the time remaining long enough to satisfy the mortgage company can be expensive.

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Re: Leasehold Condos

Post by milton » 15 Jan 2018 20:10

Insomniac wrote:
15 Jan 2018 18:30
If the lease has less than 50 years or so left on it, you might not be able to get a mortgage. Renegotiating the lease, making the time remaining long enough to satisfy the mortgage company can be expensive.
The banks around here won't touch leasehold anymore. Royal used to do it, but not anymore. Still can get financing through the local credit unions, but at a slightly higher rate and 30% down. Probably most people buying leaseholds have cash or HELOC on primary residence.

Well, I made the plunge. Let's see how this investment pans out! :D

First observation: easy to rent, wow the rental market is tight in Victoria! On the first day of posting ads, had ten people walk through and three who wanted it. Second observation: not all insurance companies insure leaseholds. And some of the ones who insure leaseholds don't insure rented leaseholds. They consider it subletting. And lots of insurance agencies haven't heard of leasehold before. That sort of surprised me. They're not common, but they're not unheard of either. Quite a few in James Bay and Fairfield areas (in Victoria). So waiting for some insurance people to research and get back to me tomorrow. Hopefully this is not insurmountable obstacle.

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Re: Leasehold Condos

Post by scomac » 15 Jan 2018 20:16

AltaRed wrote:
15 Jan 2018 17:29
Are we talking about the same thing? Condos, retirement community detached homes, etc. might all be strata, but is the land component held freehold (as in Ontario crown registered in the provincial land registry)? Or long lease leasehold (First Nations land which i believe the land registration is still managed by Ottawa)? Also, new construction on First Nations land does not incur GST/HST.

Many of our retirement communities are on First Nations land and thus are leasehold under long term, e.g. 99 year, leases. Those that are not have higher market prices.
Perhaps not. The communities I'm thinking of are not on Crown land. I would assume that the land is owned by the developer/administrator and then leased to the purchaser of the unit, but I've not really looked into the details of this. I remember that my mother was quite keen on this concept when it first came out over 30 years ago. They have only grown in popularity since from what I can gather.
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Re: Leasehold Condos

Post by milton » 15 Jan 2018 20:21

kcowan wrote:
15 Jan 2018 07:26
So my conclusion is that your observations are correct. Just don't expect to see any returns on land value appreciation. That is often what investors count on for RE rentals. This still makes it a good investment for a place to live/rent out.
AltaRed wrote:
15 Jan 2018 11:09
I see it as a trade off between low cost entry (and thus lower mortgage) for a period of time and lower capital appreciation.
It'd be interesting to see data on what happens to leasehold values when the lease starts to run out. Right now most places in town have ~50 years remaining. With so many years left, they're still appreciating. Not very quickly, mind you, but the trend is up. As the lease starts winding down, I wonder if the value of the leasehold unit becomes a function of the rent. For example, if it rents for $1500/month, a leasehold with a year left would be worth $18,000. But that doesn't quite work, as the lease could hypothetically be renewed, and perhaps--though not always--on favourable terms.

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Re: Leasehold Condos

Post by milton » 15 Jan 2018 20:25

There could even be advantages of the leasehold appreciating slowly or even depreciating from an estate tax perspective, no? If the leasehold appreciates slowly (or depreciates), then heirs would have less inheritance tax to pay. But freehold--and especially with how property prices have been going up--will give heirs a potentially huge tax hit come inheritance time.

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Re: Leasehold Condos

Post by kcowan » 16 Jan 2018 09:21

milton wrote:
15 Jan 2018 20:21
... be interesting to see data on what happens to leasehold values when the lease starts to run out. Right now most places in town have ~50 years remaining. With so many years left, they're still appreciating. Not very quickly, mind you, but the trend is up. As the lease starts winding down, I wonder if the value of the leasehold unit becomes a function of the rent. For example, if it rents for $1500/month, a leasehold with a year left would be worth $18,000. But that doesn't quite work, as the lease could hypothetically be renewed, and perhaps--though not always--on favourable terms.
It might be useful to review an actual case. The Musqueam neighborhood is SFH on leased lots.
99 year lease in 1965 $400 per lot
rental increase in 1995 $10000 per lot
rental in 2015 $25000 per lot by court order
Court decision on Musqueam rents

Of course the resale prices are impacted by the lease costs.
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Norbert Schlenker
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Re: Leasehold Condos

Post by Norbert Schlenker » 16 Jan 2018 12:45

Reading the actual 2017 reasons in the Musqueam case is enlightening. While much of it deals with discounts for on-reserve land (and discounts by the court for employing a biased "expert"), there are occasional unrebutted glimpses of what constitutes an appropriate discount for leasehold vs freehold property.

Per the OP's original interest in freehold vs leasehold 2bd1br Victoria condos, a discount of 40% based on a 55 year (remaining) ground lease looks very wrong. I'm wondering whether the "start from $220k" offerings he mentioned are on reserve.
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Re: Leasehold Condos

Post by milton » 16 Jan 2018 14:00

Norbert Schlenker wrote:
16 Jan 2018 12:45
Per the OP's original interest in freehold vs leasehold 2bd1br Victoria condos, a discount of 40% based on a 55 year (remaining) ground lease looks very wrong. I'm wondering whether the "start from $220k" offerings he mentioned are on reserve.
There's a few places in the Fairfield area in Victoria that are owned by the original developer (not on reserve). Here's a 1bed 1bath condo on the market right now off of Dallas Road offered for $189k:

https://www.rew.ca/properties/386450/40 ... ictoria-bc

I would imagine if a 2bed came up in this building it'd be offered at $220k, give or take? How much of a discount is there historically between freehold and leasehold?

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Re: Leasehold Condos

Post by Norbert Schlenker » 16 Jan 2018 14:37

The discount for leasehold with 50-60 years to run on the lease appears to have been accepted in the Musqueam reasons as on the order of 12-15%. The condo you linked is older, built 53 years ago, so maybe the ground lease is 60 years old, i.e. maybe 40 years to run. This is pure guesswork on my part, but maybe a 20-25% discount with 40 years to go. Without knowing anything else - the actual term of the ground lease (what if it was written for 75 years, not 99, and there are only 15 years left?), property condition, a "leaky condo", a looted maintenance fund, idiot neighbours, idiot board - it's hard to know why that one is so cheap.
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Re: Leasehold Condos

Post by milton » 17 Jan 2018 00:58

Norbert Schlenker wrote:
16 Jan 2018 14:37
The discount for leasehold with 50-60 years to run on the lease appears to have been accepted in the Musqueam reasons as on the order of 12-15%. The condo you linked is older, built 53 years ago, so maybe the ground lease is 60 years old, i.e. maybe 40 years to run. This is pure guesswork on my part, but maybe a 20-25% discount with 40 years to go. Without knowing anything else - the actual term of the ground lease (what if it was written for 75 years, not 99, and there are only 15 years left?), property condition, a "leaky condo", a looted maintenance fund, idiot neighbours, idiot board - it's hard to know why that one is so cheap.
One thing I've learned is that the leaseholds in Victoria--and maybe this is different elsewhere in Canada--don't have a maintenance or contingency fund. So right there there's a bit of a discount vs freehold condo with healthy contingency fund. Here's the leasehold I picked up a couple of days ago:
https://duttons.com/property/232-964-heywood-ave/
The least expensive 2bed 1bath freehold condo right now in Victoria is this one at $370k:
https://www.rew.ca/properties/386004/14 ... 641362866
The $370k freehold rents for $1525/month. I rented the Heywood leasehold after one showing for $1550/month. Afterwards I learned that a similar unit next door rents for $1800/month (both units overlook Beacon Hill Park) :shock: Heywood has 55 years to run and seems well maintained (3yr old torch on roof, heating lines completely gutted and replaced 6yrs ago, new carpets in common areas). Built in 1969 but well maintained by Devon Properties.

Could it be that the discount for leasehold vs. freehold in Victoria is larger than the national average? The last two years, property prices (on freehold) have gone up 20%+ each year, so maybe people turn up their nose at leasehold because the opportunity for capital appreciation is less?

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Re: Leasehold Condos

Post by kcowan » 17 Jan 2018 06:04

Norbert Schlenker wrote:
16 Jan 2018 14:37
Without knowing anything else - the actual term of the ground lease (what if it was written for 75 years, not 99, and there are only 15 years left?), property condition, a "leaky condo", a looted maintenance fund, idiot neighbours, idiot board - it's hard to know why that one is so cheap.
Yes when we were looking to buy in 2015, one of the obvious choices was West Royal, a luxury condo just east of Park Royal shopping centre. What I discovered was a "hidden" engineering report from 2012 outlining $20 million of remediation needed by 2020. So this property is a leasehold from the Capilano band but the improvements are impaired too. What amazes me is that people keep buying these things because the realtors never disclose all the facts. I think many of them do not really know.
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Re: Leasehold Condos

Post by patriot1 » 17 Jan 2018 14:26

kcowan wrote:
16 Jan 2018 09:21
It might be useful to review an actual case. The Musqueam neighborhood is SFH on leased lots.
The Musqueam case is highly atypical. Most leaseholds (whether FN or otherwise) have up front payments. You pay once and that's it for the next 99 years (or portion thereof if a resale). The Musqueam leasehold on the other hand had annual land rental payments to be adjusted at intervals as described above. How much the rent could be raised was the subject of the court case.

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Re: Leasehold Condos

Post by kcowan » 17 Jan 2018 15:27

patriot1 wrote:
17 Jan 2018 14:26
kcowan wrote:
16 Jan 2018 09:21
It might be useful to review an actual case. The Musqueam neighborhood is SFH on leased lots.
The Musqueam case is highly atypical. Most leaseholds (whether FN or otherwise) have up front payments. You pay once and that's it for the next 99 years (or portion thereof if a resale)...
Actually, prepayment is just one of the payment options in a leasehold. While it might have been popular in the 60s, the case does illustrate many of the issues that leasing property does present, don't you think?
For the fun of it...Keith

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