Have you ever considered buying property on leased land? This interesting arrangement is actually more common than you might think. Before you make assumptions about what this would mean or whether or not it’s a good idea, consider the advantages and disadvantages of this type of purchase.
But, first of all, what does it mean to buy property on leased land?
This purchase arrangement can happen under several different common scenarios. Basically, it means you purchase a home or building, but the land is leased. Typically leases on these types of properties run for 50 or even 100 years. Some places you may frequently see this arrangement are in condos, townhouses and trailer parks.
Now, let’s move on to the pros and cons of this unique purchasing arrangement.
Pros of Buying Property on Leased Land
The biggest factor that makes buying property on leased land attractive is that it’s often cheaper. You can own a home, townhouse or condo on leased land for much less than similar options on purchased land.
Some other pros to buying property on leased land include:
- Your lease arrangement may give you access to community amenities such as a pool, tennis courts, parking, etc.
- The rent fees may include maintenance of the property, freeing you from tasks such as mowing the lawn or gardening.
- Using this arrangement can allow you to purchase a home in areas where prices would be prohibitive otherwise.
- You avoid property taxes. Since you don’t own the land, you can’t be held responsible for the taxes on the property.
Cons of Buying Property on Leased Land
There are some significant drawbacks that may make you reconsider purchasing property on leased land. Principally, the fact that not owning the land your house is built on can lead to complications and unpleasant surprises down the line. Of course if you do your due diligence and investigate in detail, you can avoid some of these issues. However, the truth remains that not owning your land means that decisions about it lie in the hands of others. Here are some more specific cons of buying property on leased land:
- You’ll have to pay rental fees on the land. This means that although your mortgage may be lower, the land lease may add a significant monthly or yearly payment. Be sure to compare this cost with the property taxes you’d pay when purchasing a home with land so that you can figure out what your real expenses will be. Also, remember that if the lease expires and you’re able to renew it, the rent costs may be renegotiated at an increased rate due to inflation and other factors.
- If you’re purchasing a condo or townhouse, Homeowners Association (HOA) fees may apply. These fees go towards covering maintenance of shared amenities such as a pool, tennis courts, gardening services, gyms, etc.
- Equity. You won’t really build your wealth through purchasing a property on leased land the same way you would in a traditional purchase. Why? Because the value of a home typically depreciates over time. This is especially the case in leased land properties because the lease time shortens. While other homes may grow in value because of rising land costs in some communities, the rising land costs negatively affect a leased land situation because it implicates a higher rent.
- Another con to buying a property on leased land is that it may be more challenging to find a buyer in the future should you decide to sell.
- Finally, finding a lender to get your mortgage sorted can be more challenging in a leased land property than with a traditional purchase.
As you can see, there are many cons to purchasing a property on leased land. However, it really does come down to you and your unique situation. For some people, this arrangement makes perfect sense and can be a wonderful way to buy an affordable home. Others may evaluate the situation differently and choose to rent or save up for a traditional home purchase.
Buying property is a big investment and requires careful situation. Now, with this list of pros and cons, we hope you feel more prepared to make your decision about whether to purchase property on leased land or to choose a traditional purchase arrangement.