Are There Benefits to Owning a Home on Leased Land?
Here in the Palm Springs Valley, we have become accustomed to leased land. Although land leases can be found throughout the valley, they are seen more in Palm Springs and Rancho Mirage.
The primary difference between the two types of land; leased land can reduce the cost of a home by 20%-30%. So by owning on leased land a homeowner gets the use of the land without the capital outlay – therefore, getting more home for less money.
Here are a few of the questions we are most often asked about Fee vs. Leased Land:
Q. How does the appreciation / depreciation compare to fee land?
A. We can answer that question with statistics. Looking at the community of Mission Hills in Rancho Mirage, there are golf course condos on both leased and fee land. Comparing sold properties in ’05, (the peak) to ’08,(the most current full year), Leased properties had a decline in value of roughly 18% vs. Fee properties had a decline in value of about 11%.
Very close, the condition of your property probably plays a larger role.
Q. What about my heirs – children & grandchildren; will I be able to pass the lease to them?
A. In a word yes, however, if you have for instance a 65 year lease -are your grand kids going to want a 65+ year old home?
Statistics show people move every 5 years on average, that would be more than 10 turns of ownership during the life of that lease.
If you can see that you’re saving $200 / month by leasing the land vs. purchasing, that is a savings of $2,400. / year. Over the life of the lease that would be a savings of $156,000. if your money earned zero interest. Now, put that savings into an interest bearing account yielding 10% AI, the savings would exceed $1.2 million over the life of the lease – the grand kids would probably appreciate that more.
Q. What happens at the end of the lease?
A. There is no legal restriction prohibiting the tribe from selling its land; you or your heirs may have the option to purchase, if you wish to do so. However, most probably, you would be offered a new lease based on conditions at that time. There would be no financial advantage to taking the land back and as the tribe long ago observed, “One cannot eat dirt”
It can be an investment hedge whether home prices are rising or falling. During a “up” period, your home will increase in price, during a “down “period, the dollars you did not spend on land, but invested in a fixed interest savings account would have increased.
A few notes of caution are called for; when considering purchasing a home on leased land – review the lease carefully; look for escalation clauses, lease transfer fees, and most importantly, make sure the end of the lease is more than 35 years.
For example, you will not be able to get a 30 year mortgage on a property that has a lease expiring within 5 years of the payoff on a loan.
Also, check the lease to see if there is an option to purchase the lease at some point during the life of the lease or even at the end. Currently, if there is an option to purchase the land, the lease payments will be deductible on your taxes, much like your mortgage interest is tax deductible.
In a nutshell, do your homework – know the details of the lease terms. If you are comfortable with them, owning a home on leased land can be a positive investment opportunity.