Thinking about buying a home?

You've probably heard a lot about owning the entire property, land and all. But what if we told you there's another way to achieve the dream of homeownership, through something called a leasehold? It might sound a little different, but for many, it can be a valuable pathway to owning a home. Let's break down the basics.

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Leasehold vs. Full Ownership: What's the Big Difference?

In the world of real estate, the most common type of ownership is called freehold (or fee simple). This means you own the property and the land it sits on indefinitely.

A leasehold, on the other hand, means you own the building or home for a long period of time through a lease, but someone else retains ownership of the land. Think of it like a long-term rental, but with a significant difference: you own the structure! Instead of buying the land, you lease it, often for many decades (common terms are 30, 60, or even 99 years). 

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What Stays the Same? The Benefits of Homeownership

Even though you don't own the land in a leasehold, many of the perks of traditional homeownership still apply:

1. You can get a mortgage: Just like with a freehold property, you'll likely need a mortgage to finance the purchase of the house in a leasehold. Jubilee partners with lenders who are familiar with this type of arrangement.
2. Potential Tax Benefits: You can still enjoy potential tax benefits associated with homeownership, such as deducting mortgage interest and property taxes (always consult with a tax advisor for personalized advice).
3. Building Equity: As you pay down your mortgage, you build equity in the home itself. And if you have the ability to buyout the land (like with Jubilee), you also share in the overall property’s appreciation over time, just like a normal property.

Pride of Ownership: You own your home, can personalize it, and enjoy the stability that comes with having a long-term place to live. You have the freedom to renovate and make it your own.

Understanding Key Terms in a Ground Lease

The document that outlines the lease of the land is called a ground lease. Here are some crucial aspects to understand:

• Lease Term: This is the length of time you have the right to occupy the land. It's usually a long period, like 99 years, giving you significant long-term security.
• Ground Rent: This is the monthly payment you make to the landowner for the use of the land. The initial rent is typically a percentage of the land's value.
• Rent Adjustments: Most ground leases will have a mechanism for the rent to change over time, often annually. A fair lease will usually tie these increases to the Consumer Price Index (CPI), a common measure of inflation.
• Rent Caps: Another sign of a fair lease is a cap on how much the rent can increase each year, for example, a maximum of 5%. This protects you from drastic and unpredictable rent hikes.

Buyout Option: Many ground leases offer you the option to purchase the land at some point during the lease term. The method for calculating the price to buy the land is a key part of the lease. A reasonable approach is for the price to be based on the appraised value of the combined property (land and house) at the time of the buyout or the actual sale price if you sell the property.

Where Can You Find Residential Ground Leases Today?

While leaseholds are less common than freehold properties in the United States, they do exist in certain areas:

• Native American Trust Lands: On many tribal reservations, land is held in trust and leased to individuals for homes through long-term ground leases, often for 50 years.
• Stanford University: To maintain long-term control of its land, Stanford offers 99-year ground leases to faculty and staff who purchase homes on campus.
• Hawaii: Due to historical land ownership patterns, Hawaii has a significant number of residential leasehold properties, including condos and houses.
• Palm Springs, California: Some homes in Palm Springs are located on leased land belonging to the Agua Caliente tribe, with lease terms of 65 or 99 years.
• Land-Lease Communities: These include manufactured home parks and some retirement communities where you own your home but lease the land it sits on.

Understanding leaseholds opens up another potential avenue to homeownership, often with a lower upfront cost. By familiarizing yourself with the key terms and looking for fair and flexible lease agreements, you can determine if this unique form of property ownership might be the right fit for your home buying goals.