Watch This Before You Buy A Leasehold Property In Hawaii

So we always get these calls. Why is this place only a hundred thousand dollars? Why are things too good to be true? Because they're leaseholds. So we're here at the executive center in town. Not everything here is a leasehold, but there are leaseholds. In this video, we're going to talk about why leaseholds are priced the way they are. What is a leasehold versus fee simple? Can you change that? Should you buy it? Should you not? Are they good investments? We're going to get all the details about leaseholds and talk about this building specifically a little bit. All right, guys. So first, what is a leasehold? People call in, right? And they're like, all the time. Usually if they say, you know, Oh, I saw something for 150 or 200,000, it's three bedrooms, way cheaper than it should be. Not even just it's in bad condition. It should be 800,000, but it's 400,000 or something like that. Doesn't equate to need to renovate it. No, there's something else going on there. Typically that's leasehold. It's not really a thing on the mainland in the 49 States, except in commercial. If you're a commercial real estate agent watching this, you're like, Oh, I know about that. But here in Hawaii in one of these buildings, you might have all of these sold. It might be leasehold and fee simple. So what is it? Fee simple, real estate is you own the land, the square and you also own the single family house or the condo building, you know, the one 100th of the condo building that you own your four walls. When it's a leasehold, Mahe, the big, bad capitalist. It would be me over her. It would, but for today, that's my land. This is Mahe's land. You don't own the land. I own the land. Or one 100th or one 1000th or one 257th, whatever, however many units get right. You don't own a piece of the land. You just own the four walls. Yeah. And you only own the four walls for the duration of that lease term. I, as the leaseholder may, and often do charge you an additional fee on top of your HOA. Yeah. And that's like a monthly lease rent, right? So you're leasing the land from Mahe or from AIG or from whatever conglomerate fund that purchases this very expensive land and they lease the land back to the building owners. So say there's a hundred units, every person pays an equal amount to lease the land. It's usually based on square footage, et cetera, just like HOAs are. So why would I buy real estate where I don't own the land? If it's a single family or a portion of the land, if it's condo, why would I do that? Well, we most times think you shouldn't, but if you are maybe at end of life and you just want to control a piece of property for the next 20 years, cause Hey, you're already 80 years old. Maybe it makes sense in that case. If you were somebody who was going to pay an astronomical amount of rent to have a luxurious, you know, last five years of your life anyway, maybe. I'm like trying to think of what are different things besides, Oh, you're going to die. Cashflow extremely well. So an executive center, if you are Airbnbing caveat to that, it's not real estate advice, not saying you can or should, but you are short term renting a unit and a cashflow is just disproportionately high. So you run the opportunity cost, right? I bought it for a hundred thousand. If it should go up 4% per year, that's 4 grand. And then it's 4,400. And then, but I cashflow like 10 grand more. And so maybe for a few years you can make sense of it maybe. But the other thing about that is leaseholds tend to depreciate over time. So as the lease is expiring, as the big landowner is saying, Hey, time's up, time's up. Yeah. Your asset goes down in value. That's what leaseholds are. Typically when we're buying real estate, we're looking for appreciation. We're not looking for diminishing returns on our investment. And leasehold is just one of those very rare where, you know, almost always in Hawaii, you can generally say, if you hold onto it long enough, it'll do its thing. Even though condos don't, in most cases on average, appreciate at the rate of single family, still you would expect your Hawaii condo to be worth more. Yeah. The longer you hold onto a leasehold property, the less it's worth. In a nutshell, that's a leasehold. We're going to talk about it some more. One of the questions we get is, can you get a loan for a leasehold property? And the answer is yes, but it's situational. It depends. The terms are different. One of the main things to think about in terms of the term is if the lease has only 20 years left on it, they're not going to give you a 30 year mortgage, right? Because it's only 20 years. We don't know what's going to happen to the property after that. That brings up another point. They could continue to make the lease available and you could continue to live in your unit or they could take it away. Like you, that's not your unit anymore. At the end of that, they're only going to give you the term of the lease and then that's it. That's how long your loan is going to be. So my, give us an example because my did some research, although we kind of know, but she did some specific research. What would a leasehold and a place like executive center costs versus a similar fee simple property. There's a disparity between the two. Leasehold cheaper, regular real estate fee simple more. And then in between that there's the fee purchase. Because when it's a leasehold, sometimes it'll say fee available. So it'll say like FAA on our system, you can purchase the fee and make it not a leasehold. So remember leasehold bad in general. And then fee simple is regular real estate good. You can make it that by buying out the fee. So then the question would be, you have to put like 400 grand down on a $500,000 place. No. So like what's the difference in price between these one bedroom executive center for a one bedroom, one bath, two similar products. So two similar units, a fee simple unit is running in the 500. So around 500,000 up to mid 500,000 and executive center has all sorts of variation. There's different stacks. Yeah. There's bigger units, smaller units, but one bedroom 500 ish for fee simple and for the leasehold unit, similar to that one, the current price, cause they did start higher, 150,000. So 500 take off the one 50 where three 50. And how much was the fee purchase? The fee purchase. So the fee is available on that, you know, something to keep in mind. Not every unit has a fee available for purchase. Yeah. So if the fee is available and this one was, it was available for 378. Oh, that's a bad deal. So I'm going in and I was the $150,000 leasehold a lot nicer than the $500,000 fee. Simple one. Pretty similar. 150 is too much for the lease. So then if you got to pay 378, so now you're going to be all in. Uh, may I ask what's the purpose for the fee? We do real estate videos. Okay. Well just show people on the island because this is private property. We just ask that you do it out on the public sidewalk. Okay. Yeah. All right. I'll say we've had that happen all sorts of time. At least Brado was nice. I understand you got to do your job. Where were we? So 150 plus 378, 528. You're 28 over. Derek's going to educate us a little bit more on this because I have not actually done a fee conversion. I've not had a client yet who it's made sense for them. Let's talk about the fee conversion. If you want to buy a leasehold and let's say that that leasehold that was 150 was like at one. So you're actually going to come out 22,000 the better. Assuming they were same same units come out 22,000 better for having bought the leasehold, do the conversion and getting a fee simple unit that's actually worth a little bit more than it otherwise would have been if you didn't have to go through the hassle. Well the question is, as it is with any kind of real estate investing, how much was the hassle worth? How much hassle? It's actually pretty easy. It's more the lender and the title company. It's not a big deal for you guys. If you want to buy a leasehold and do the fee conversion and we underwrite it and the numbers make sense, I would not avoid doing it if that's the building and the thing I wanted to be in. But let's have a conversation about should you even buy in a building that has mixed fee simple and leasehold? I don't tend to like it personally. Cause think about it. A hundred units, 50 or fee simple. So they average 500,000 in value, but then the other 50 average 120% of that. The average of the building looks skewed. It just looks like a less attractive building. Like imagine Brad, Jason, the rock from this side. And then imagine something else, you know, from this side and you don't want half half. I would tend to want to buy in a building that is as a whole a fee simple building. Situationally, clients may choose to buy a leasehold and do a fee conversion. It's not a big deal. We put it in the contract. It's contingent on being able to successfully convert the fee and purchase it. The lender, the title company, it's not that big of a deal. And because you're purchasing the fee, the elements of, Oh, the lease is not long enough for us to get lending on it. That's different. Now you can do it. It'll become a 30 year term, a traditional mortgage under traditional term. And in theory is more probable to be an appreciating asset just as other condos would likely appreciate. Nothing's guaranteed, but let's talk about a situation where I might consider it. And let's talk about the executive center specifically. I know someone who's owned one. They're thinking of selling it. I was thinking of buying it. There are reasons I thought about it, but I didn't. Let's go talk about that. Let's talk about executive center. The reason why I considered it was for a short-term rental play. I was underwriting the numbers. Like you can rent a lot more if you can rent a night or two nights or three nights at a time, not having to do 30 or 90 days. We did a live stream on that topic. You can refer to last week's live stream. So we talked about the new Hawaii law 30 versus 90 day rental term. But the thing is, is executive center may continue to be grandfathered in to offer short-term renting. I know for a fact you're short-term renting there now, because there's an Aston hotel desk. If you own a unit in there can put it in the hotel pool and Aston would think if you don't know about Aston, cause they're not popular where you are. I think Hilton, think Marriott, like Aston can rent your place out for you in the hotel pool. And I was just talking to the front desk person and they were saying that there's also people still self-managing, right? One of the board members, she's an attorney, very smart, very helpful. But I told her, Hey, and you're not zoned resort. So in the bills that were put forth to change the laws, et cetera, you needed to be zoned resort or hybrid resort residential to continue to do short-term renting or even midterm renting. But then this is BMX use. It's always been a hotel. BMX is business mixed use. It's always been a condo hotel, hotel type of situation. And so the laws that were put forth kind of left this out and didn't clearly address it. My understanding from a year or more ago when I talked to the board member was that their attorney is working with the city to, I guess, amend the law, or grandfather them and something to that effect and should be fine. Should be permanent. How are you going to not have the executive center be a hotel? Like what's this? Your father-in-law, my father-in-law who worked for Hawaiian electric and would come here for work sometimes, or, you know, just to come see his kids here. He'd be here maybe a week at a time at the longest. This is for some reason, that's the spot, you know, you could walk to eat, whatever you're in Chinatown. It has a hotel lobby. Essentially. We cannot tell you by executive center, it will forever be grandfathered in and you always be able to Airbnb it or short-term rented. I feel like you probably would be able to, but I can't give you that official real estate advice right now unless you became our client and we needed to get the absolute clarification from the city and it'll probably still be vague and undecided at this point is what my understanding, but that's why I was going to consider buying an executive center, even though it's a mixed leasehold fee, simple place. And I said, I don't usually want to buy that. I'm talking about like regular living. What I invest in a business mixed use quasi hotel sort of thing. I don't invest there. Just numbers just have to make sense. My insurance and my exit and my timing, all of that underwriting just has to make sense. And I would consider it, but I wouldn't consider it for other reasons. Another thing, principally I like to stay away from some people will buy this sort of asset, something with an HOA and maintenance fee that high. So these are small units and the ones that are as small as 400 square feet still have roughly like a $900 HOA for 400. She mentioned square footage because usually it's like a 500 square foot thousand dollar maintenance fee thousand square foot. When I say five and two thousand double, what did I say first? Anyways, based off square footage, sometimes you watch, sometimes I just don't hear what you say. And some of the fees that we saw on like the over a thousand square foot units were like North of two grand, right? I don't tend to want to have that kind of fee, even though I own in Coalina where my fee is now over a thousand dollars. That's a big unit though. It's a big unit. You get a lot for it. It's not that you're built on this old sewer system and this old place and an old building. It's that we have a newer place that's in a resort. I like that investment, even though my fee is expensive. And if you're using it as an investment property too, I know you're not self-managing in something like this. Not short term though. I at times regret managing, self-managing my midterm where it's only about 11 bookings a year. That's humbug. Something to keep in mind, the potential for earning can be higher on a short term rental investment. But if you are using property management, it's usually higher as well. There's more managing that needs to happen. There's cleaning. So if you're in the hotel pool, it can be up to like 60%. It can be very high. So you need to make sure that you're looking into who manages in that building, what's included, how much that costs because it's not going to be your normal 10% like some people, Oh, they just assume 10% off of that. I'm like, no. Well, another thing is, do you want to buy a job, right? So say you're a nurse and you work in the Bay area in California and you make a hundred dollars an hour and you take call and, well, I've been reading on investing and now I want to get a short term rental. You'd be better off taking an extra shift and like owning something that you can long-term rent. So I'm not saying don't buy real estate to invest. I believe in that, but don't have to buy something that's so active. Think about how active you have to be in an investment. And yeah, you're right for me, executive center, it would have to underwrite so well that I could pay like 25% of my rental income to a really active property manager. And because I just didn't see those numbers, it didn't work. And I will say as a disclaimer, call us for all your real estate needs. Go to coreteamhawaii.com, go to the bottom, fill out the contact form. Our assistant is there ready to call you Sunday through Thursday and on Fridays and Saturdays, the rest of the team tries to pick up the slack and call you right away. But Fridays and Saturdays, there could be a little lag. So some people are watching and they're like, Oh, so what? So you guys got these holds that are like 50, 20 grand and I can convert them. And as soon as I convert them, I'll have like a hundred grand in equity. No. And I'm just going to be honest with you. If I see that, Oh, you're buying it. I'm I'm we'll just buy it. Like we'll as a team buy or something. Like we don't walk around and find a hundred thousand dollar bills on the ground. Though I do have a story, just quick story. I wanted to buy a house, wrote an offer. I figured out my client wanted to buy the same house. I ripped up my offer. I never told my client and my client bought the house, got their family and got a great deal. I mean a really good deal. If I have fiduciary duty to you and you want to buy executive center and we happen to find a deal, then that's your deal. You saw the leasehold underwriting. They're actually underwriting it to be more expensive than it's not worth 150 and they're going to sell it for 150. These are unicorn deals. It's not the common thing that you're going to buy it. All of a sudden convert that fee over and boom, you're walking into 500 grand in equity. And just because it's a leasehold and we've explained some angles, doesn't mean you're going to angle it into all kinds of profit. Now if you want to spend your time just searching, refreshing, searching, refreshing and be a real estate investor, you can do that anyway. You can do a Phoenix, you do Alabama executive center. And usually it's years and years in between these deals where someone either made a mistake and sold it for too cheap or for whatever reason, they left all kinds of money on the table. I'm just cautioning you that leaseholds aren't this unicorn. Like I'm going to make money and learn how to convert them. Since we formed the team, like we've not sold a leasehold. We don't sell leasehold. It's almost never makes sense. So it just almost never happens. We tried to explain as much as we could today on leasehold versus fee simple. But if you still have questions, whether that be about executive center, the difference between fee simple and leasehold in general, how a fee simple conversion works, go ahead and go to coreteamhawaii.com as always scroll down to the bottom, fill out the contact form. Let us know you want to learn more about leasehold versus fee simple and somebody from our team will reach out to you.