When you’re considering buying a property, it’s important to understand the difference between fee simple ownership and leasehold. Why? Because with fee simple ownership, you own the property outright – there are no restrictions on what you can do with it. With a leasehold, on the other hand, you only reside in the property for a limited period of time; after that, the property reverts to the owner.
Additionally, leaseholders may be subject to certain restrictions, such as not being able to make changes to the interior or exterior of the property, something that can be particularly important when considering a commercial property that may need to be redesigned to accommodate a particular business type. So before you open your wallet, be sure to fully understand the implications of each type of ownership.
MY SMART COUSIN
Want to get into property ownership? We can help you move from vision to execution! At MY SMART COUSIN, we provide the expertise and resources for budding property investors and homebuyers of all stripes, especially those who are looking to buy a house for the price of a car, the same way we have dozens of times.
As Real Estate Investment Coaches, we work with aspiring homeowners and investors, with a particular focus on Black and Brown folks and women, to develop and implement an investment strategy, including, whether you should consider fee simple or leasehold ownership.
WHAT IS FEE SIMPLE OWNERSHIP?
Fee simple ownership is the most complete form of ownership. The owner has full use and enjoyment of the property and can dispose of it as he or she wishes. There are two types of fee simple ownership: Fee Simple Absolute and Fee Simple Defeasible.
· Fee Simple Absolute is the most common type of fee simple ownership. The owner has an unrestricted right to enjoy and dispose of the property.
· Fee Simple Defeasible is less common and may be subject to certain conditions, such as the payment of taxes, or compliance with zoning regulations.
In either case, fee simple ownership gives the owner a great deal of control over the property.
WHAT IS A LEASEHOLD?
When you hear the word “leasehold,” you might think of leasing a car. But in the context of real estate, a leasehold is an ownership interest in land that is leased from a lessor.
· The most common type of leasehold is a residential lease, in which a tenant pays rent to a landlord in exchange for the right to live on the property. Leasehold structures are often used for manufactured housing, where the manufactured house itself might be owned by the resident, but the land that the house sits on is leased.
· Commercial leases are also common and can involve anything from office space to parking lots. Leaseholds can be either short-term or long-term, and usually include an option to renew the lease at the end of the term.
In some cases, a leasehold may also give the tenant the right to purchase the property outright. Whether you’re looking for a place to live or a place to do business, it’s important to understand the basics of leaseholds before signing any documents.
SOME OF THE KEY DIFFERENCES BETWEEN FEE SIMPLE OWNERSHIP AND LEASEHOLD
When you purchase a home, you may choose between fee simple ownership and leasehold ownership. While both options offer the potential for long-term stability and security, there are some key differences that you should be aware of before making your decision.
· Fee simple ownership gives you full and unencumbered ownership of your home. This means that you will own the property with effectively no strings attached, and can do with it as you please. Because you own the property in full, you also own all of the attendant obligations including responsibility for maintenance, repairs, property taxes, and property insurance.
Leasehold ownership, on the other hand, does not provide the same level of control and the same scope of responsibility. Instead, you will be leasing the property from a landlord for a set period of time. During the lease period, you will be responsible for paying rent and following any rules or regulations that are set by the landlord. You will also be responsible for paying utilities and other expenses that the landlord assigns to you in the lease, such as trash, pest control, and landscaping. At the end of the lease, the property will revert to the landlord.
Another key difference between fee simple ownership and leasehold ownership is the length of time that each option provides.
· Fee simple ownership is typically permanent, meaning that you will own the property for as long as you wish.
Leasehold ownership, meanwhile, is typically much shorter in duration. Most leases are for a maximum of 99 years, after which point the property will revert to the landlord. This means that if you purchase a leasehold property, you should be prepared to relinquish ownership at some point in the future.
Next, it is important to note that fee simple ownership typically offers more security than leasehold ownership. This is because fee-simple ownership gives you full control over your property, while leasehold ownership leaves many decisions up to the landlord. As such, fee simple ownership may be a better option if you are looking for a long-term investment.
· Fee simple ownership is typically more expensive than leasehold ownership because you are buying the property outright, and with it, the attendant risks, taxes, and obligations of ownership. With a leasehold, you are only paying for the right to use the property for a set period. Some leases, particularly very long-term leases, require that some portion of maintenance be paid by the lessee, so you will want to explore and negotiate this.
· The duration of a fee simple ownership property is effectively forever, or until the owner sells it. Leasehold properties usually have a maximum lease duration of 99 years, and in practice, are often only a few years or decades.
· If you own property through a fee simple structure, you are responsible for all maintenance and repairs. With a leasehold, the landlord is typically responsible for maintenance and repairs.
· When you own a property as fee simple, you can pass it down to your heirs. With a leasehold, the rights to use the property typically expire when the lease agreement expires- meaning it cannot be passed down to your heirs.
FINAL THOUGHTS
In conclusion, it is important to understand the key differences between fee simple ownership and leasehold before making a decision on which type of ownership you would like to pursue. If you are still unsure which option is right for you, contact an experienced real estate investment coach, attorney, or tax professional who can help guide you through the process.
YOU CAN ALSO READ: HOW TO BUILD UNSHAKABLE CONFIDENCE AS A REAL ESTATE INVESTOR
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