Can’t Afford a Home in Your Desired Location? Try a Leasehold Property
If you’re OK with owning a home but not the land, a leasehold property could be a great affordability solution, says local Realtor Alyssa Dotson
Alyssa Dotson
Other
Situated in some of the most affluent neighbourhoods in the City, a condo, townhome or even a detached property awaits your purchase for a significantly lower price than that a similar home in the same area. In the West End, False Creek, Kitsilano, Fairview Slopes and Point Grey in Vancouver and popular South Arm and Brighouse in Richmond, this option is frequently available for the house hunter. Does that sound too good to be true? Depends who you ask.
A renter who is looking to get into the real estate game but can’t afford a freehold property in their desire area may find buying a leasehold home a great compromise, enabling them to keep payments low without having to downgrade their location. After all, a lease is just another term for renting, right? As in a leasehold property? Yes.
So how does it work? In Canada, land administration is generally divided into two categories: fee simple (freehold) land and leasehold land.
Freehold vs. Leasehold
Freehold land is held by the majority of residential purchasers. This type of land is owned by the registered owner including all the properties rights that are associated with the lands. There can be restrictions on the title for instance a restrictive covenant, easement, statutory right of way or a building scheme but the owner owns the land and the restrictions that come with it.
Leasehold land is land in which the rights to the land are limited since it is leased to the purchaser by another party: “the landlord” The “landlord” is usually the federal government, the City where the land is located or a First Nations band. Long-term leases can be up to 99 years. Within the lease specifications, the “tenant” owns the right to use the property for a specified amount of time. Within this time frame, the owner/tenant can resell the property and profit from market appreciation. Although leasehold land tends to appreciate on a smaller scale in comparison to freehold land, it does appreciate with the market.
Leasehold is Cheaper – Up Front
The total purchase price of leasehold land is considerably lower than a freehold purchase, as the land is not yours. As such monthly payments will be lower than those on a similar freehold property, based on mortgage amount.
How much cheaper? For example, a search on REW.ca in July 2015 showed a three-bed, 1325-square-foot leasehold townhome in Vancouver’s Champlain Heights (see neighbourhoods, below) listed for $379,000 – much cheaper than the 1,300-square-foot three-bed freehold townhouse listed for $505,000, just a few streets away.
However, do keep in mind that leasehold payments are required on top of monthly mortgage payments if the payments have not been pre-paid.
When buying a leasehold strata, the strata fees are also not included in the additional leasehold payments and would have to be paid to the strata separately. Of course, that’s true for freehold strata homes too.
It’s also important to remember that when making a residential real estate purchase, you are investing in a depreciating asset – the building – and in an appreciating asset – the land. Where land is leased you are not maximizing market appreciation.
Getting a Mortgage on a Leasehold Property
Although mortgage lenders vary with guidelines and financing options, most tend to require a minimum of 30 per cent down on a leasehold property, although a few will consider a lower down payment.
Another key component in financing is the duration of the time remaining on a lease at the time of the mortgage application. A lease with 15 years or less remaining may be a deal breaker for some mortgage suppliers as the amount of the lease payments can drastically increase when the lease comes up for renewal putting the mortgage applicant in danger of keeping up with their monthly payments especially if their mortgage is amortized over 25 years. Also, the marketability of a lease coming up for renewal relatively quick is diminished significantly in terms of attractiveness to potential buyers as future terms and interest rates are unknown.
Education Is Key
As with any financial or life endeavour, education is key. The way to change that is to research and gain knowledge so that you can be aware of the possible complications and hiccups that can arise. Educate yourself regarding renewal procedures, terms, interest rates, resale value and consult legal advice before moving forward if purchasing leasehold land has presented itself as an option.
Where to Find Leasehold Homes
So where can you find these leasehold gems? Start by doing a search on REW.ca in your preferred neighbourhood, then filter the results with the keyword “leasehold.” Here are a few areas to get you started.
Burnaby
- SFU UniverCity: a sustainable urban community of multifamily townhouses and condos. Prepaid 99-year leases means that prices are closer to those of freehold units.
Chilliwack
- Cultus Lake is a municipality lease from the provincial government.
- Residential leased land is predominantly First Nations. Chilliwack and District Real Estate Board president Steve Lerigny says, “We’re not only surrounded by leased land, but interlaced with it. You’ll see pockets of it within regular subdivisions. And the different bands handle their leases differently.”
Coquitlam/Langley/Surrey
- Non-prepaid lease parks for mobile or manufactured homes.
North Vancouver
- Roche Point near Dollarton / Deep Cove. A gated development owned by Tsleil-Waututh First Nation.
- Lynnmour marina and float homes.
Richmond
- South Arm condos.
- Granville Richmond condos.
- Bridgeport float homes.
- Brighouse condos.
- West Cambie Richmond float homes.
Vancouver
- City-owned False Creek South neighbourhood between the Cambie and Granville bridges with condos and townhouses nestled beside Burrard Inlet. Note that some leases start expiring as soon as 2036.
- City-owned Champlain Heights near Boundary and East 54th Avenue in East Vancouver.
- University-owned UBC endowment lands. Prepaid 99-year leases with prices mostly on par with similar freehold properties.
- Musqueam-owned area close to Pacific Spirit Park, UBC and shopping districts. Mix of prepaid and non-prepaid.
- City-owned West End apartments and condos, many with ocean views, near the heart of downtown Vancouver.
- Dotted throughout the city, including in Kitsilano, Fairview and Mount Pleasant.
West Vancouver
- Park Royal area: City-owned and Squamish-Nation-owned land featuring everything from condos to the Capilano Mobile Home Park, an adult-oriented retirement community tucked away beside the Capilano River.
© 2015 Real Estate Weekly