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If you, as a real estate investor, were in conversation and someone asked you about a leasehold estate, would you know what it means?
Sure, you can pretend in conversation.
But you can’t pretend when your time and money are on the line with a deal.
The success of your real estate investing business depends on your knowledge, understanding, and your willingness to learn more about the craft.
It’s this knowledge that can not only enhance your profitability — it can also reduce your risk by, for example, helping you see red flags, understand how costly they are, and instead choose a more profitable property.
If you don’t know what a leasehold estate is — or you’re curious about how it affects your real estate investments, let’s get started.
What is a Leasehold Estate?
A leasehold estate allows a tenant to have possession of property for an extended period of time.
If you’re currently a landlord, and you’re renting a property to tenants, you have a leasehold estate.
Leasehold estates can vary from property to property and person to person. Some can last a few years and others can last a few days. Tenants may have different rights from property to property when it comes to a leasehold estate, too.
Generally, leaseholds fall into four categories, and we’ll look at each type next.
Types of Leasehold Estates
Estate from Period to Period
In this type of leasehold estate, the lease term is specified in the contract for a period of time.
This period of time can run on a basis of:
- year to year
- month to month
- or even a weekly basis
Estate for Years
This type of leasehold estate — commonly used for commercial spaces — has a fixed yearly term that normally lasts for more than your typical one-year lease.
Because this type of leasehold estate can run for several years, you must have a written agreement with the lessor or property owner a written contract is critical.
Estate at Sufferance
In estate at sufferance, the terms of the contract specify that a tenant can occupy the property after the specified term has ended as long as the tenant continues to pay the agreed-upon rent.
The landlord can terminate this leasehold estate at any time.
Estate at Will
Estate at will exists where there is no written end date for the tenant’s residency and it’s considered month to month. In an estate at will case, either party — landlord or renter — can usually terminate a lease.
The terms of termination are laid out before a tenant moving into the property between landlord and tenant and will specify that prior notice is required.
What a Leasehold Estate Means for Real Estate Investors
When buying a property with plans to rent it out either to a tenant or on a platform like Airbnb you are buying a leasehold estate.
Be sure before investing in a property to research your local city and HOA, if applicable to your property, rules when it comes to leasehold estates.
For example, certain areas will require rentals of 30 days or more with formal contracts between tenants and landlords, eliminating the possibility of certain leasehold estates.
Leasehold Estate vs Freehold Estate
In addition to a leasehold estate, you might hear the term “freehold estate” when it comes to real estate.
What’s the difference?
The big difference between a leasehold estate and a freehold estate is that when someone has a freehold estate, they typically have exclusive rights to the property for an unlimited length of time.
In addition, there should be no timeline of ownership leading to the ability to pass the property down.
Leasehold Estate: The Bottom Line
There are many different types of leasehold estates — these individual types can vary in terms.
As a landlord, it’s important to know and understand each type of leasehold estate and how it affects your real estate investment so that you can ensure your next deal is safe, legal, and profitable.