Leasehold vs. Fee Simple Interest in Hawaii Real Estate: What You Need to Know

When it comes to buying real estate in Hawaii, one of the first concepts buyers must understand is the difference between leasehold and fee simple ownership. Unlike most states where nearly all properties are owned in fee simple, Hawaii has a significant number of leasehold properties. Understanding the key differences between these two types of ownership can help buyers make informed decisions.

What is Fee Simple Ownership?

Fee simple ownership is the most familiar type of real estate ownership in the United States. When you purchase a property in fee simple, you own both the land and the improvements (house, condo, or building) indefinitely. You can sell, rent, or pass the property to heirs without restrictions beyond standard zoning and legal regulations.

Fee simple ownership provides stability and long-term security, making it the preferred type of property interest for most homebuyers and investors.

What is Leasehold Ownership?

In a leasehold property, the buyer does not own the land. Instead, the land is owned by a third party (often a trust, private landowner, or institution), and the property owner leases the land for a fixed period, typically 30 to 99 years. When the lease expires, ownership of the land and potentially the improvements (buildings, homes, etc.) revert back to the landowner, unless the lease is renegotiated or extended.

Key Aspects of Leasehold Ownership:

• Lease Rent: The leaseholder must pay a periodic lease rent to the landowner.

• Lease Term & Expiration: Once the lease expires, ownership of the property may return to the landowner unless an extension is negotiated.

• Limited Appreciation: Leasehold properties generally appreciate less than fee simple properties due to the uncertainty surrounding lease renewals and expiration.

• Financing Challenges: Many lenders are hesitant to finance leasehold properties, particularly if the remaining lease term is short.

• Potential Lease Renegotiations: Lease terms may change over time, leading to increased lease rent or different conditions.

Why Does Hawaii Have Leasehold Properties?

The prevalence of leasehold properties in Hawaii stems from the history of large landownership by families, trusts, and institutions such as the Bishop Estate, Kamehameha Schools, and the University of Hawaii. These entities have traditionally leased land rather than selling it outright, contributing to a substantial leasehold market, especially in areas like Waikiki and Honolulu.

Pros and Cons of Leasehold vs. Fee Simple

Should You Buy a Leasehold Property?

Leasehold properties in Hawaii can be a good option for some buyers, particularly those looking for lower-priced homes in high-demand areas. If you are considering purchasing a leasehold property, it’s important to:

• Review the lease terms carefully, especially the expiration date and potential rent increases.

• Consider whether financing is available.

• Assess whether the property aligns with your long-term goals.

• Understand the risks associated with lease expiration and renegotiation.

Final Thoughts

For most buyers, fee simple ownership is the preferred choice due to its stability and long-term investment potential. However, leasehold properties can offer an affordable alternative in Hawaii’s competitive real estate market. If you are considering purchasing property in Hawaii, consult with a knowledgeable real estate professional to help navigate the nuances of leasehold and fee simple ownership.

If you have any questions or need guidance on finding the right property in Hawaii, feel free to reach out. I'm happy to assist with all your real estate needs!