Understanding Property Ownership in Hawaii: Fee Simple vs. Leasehold

For anyone looking to purchase property in Hawaii, understanding the nuances of real estate ownership is crucial. This post breaks down the key differences between fee simple ownership and leasehold ownership to help in making an informed decision.

What is Fee Simple Ownership?

Fee simple ownership is the most common form of real estate ownership in the U.S. When purchasing a fee simple property, ownership includes both the building and the land. This allows for building equity, selling, leasing, or passing the property on to heirs, all within local regulations.

Benefits of Fee Simple Ownership:

Full Control: Make improvements, rent out the property, or sell it without needing permission.

Equity Building: As property values appreciate, so does the investment.

Long-Term Security: Ownership is indefinite, subject to local laws.

What is Leasehold Ownership?

In contrast, leasehold ownership means the land is not owned; a long-term lease (usually 50 to 99 years) allows occupancy of the building. While interior changes can be made, once the lease expires, the property must be returned to the landowner, including any improvements.

Key Points about Leasehold Ownership:

Limited Control: Modifications from the exterior to permanent changes will require the owner's approval.

Monthly Costs: Both lease rent and homeowners association (HOA) fees apply.

Potential Loss: At the end of the lease, any improvements revert to the landowner, resulting in no financial return.

A Practical Example

Consider the Hawaiian Prince Apartments, priced at $82,000. While this seems like a great deal for a one-bedroom unit in Waikiki, it's a leasehold property. The monthly lease rent is $677, set to increase annually, plus a $401 HOA fee, totaling about $1,078 per month. The initial price for this leasehold property would most likely need to be paid in cash upfront, amounting to $82,000.

Over 16 years, this would amount to $206,976 in lease rent and HOA fees, plus the initial $82,000 upfront payment, with no return on investment, as the leasehold would not appreciate in value. This means the total cost over time with no gains would still exceed $200,000.

Now, compare this to a fee simple property in Waikiki Townhouse at the same price. The monthly mortgage would be approximately $3,500 (including HOAs) at a 6.9% interest rate. Over 16 years, this property could appreciate to over $370,000, yielding about $104,000 in equity. Unlike the leasehold property, the fee simple option offers long-term financial gains through property appreciation.

Choosing the Right Option

The financial implications and ownership rights clearly show that fee simple properties are often a better long-term investment than leaseholds. Although leaseholds may have attractive initial prices, ongoing costs can accumulate, resulting in no return on the investment.

Hawaii Home Group is dedicated to helping navigate these complex decisions. Whether interested in fee simple properties or needing clarity on leasehold options, assistance is available.

For more detailed information, check out this video: Understanding Property Ownership in Hawaii.

For questions or personalized advice tailored to specific needs, please reach us here.

Thank you for exploring Hawaii’s unique real estate landscape. This information is hoped to be helpful in the journey to finding the perfect home in paradise.