The main argument against buying property on leased land revolves around the fact that it is not possible to determine whether or not there is a lease in effect when you purchase it. If no lease exists, there would be no guarantee of rent and so then the owner would go unpaid as well. Furthermore, buying via purchased by negotiated lease means paying for both your own land license and for the fee charged by your leasing agent or company which means that ultimately you could end up with less actual money from your sale than originally anticipated. As such, you should avoid buying property on leased land.
Here are the Pros, Cons and Costs Involved in Buying Property on Leased Land:
Pros of Buying Property on Leased Land:
- You can invest in property without having to pay rent.
- The initial costs involved in purchasing a property on leased land is low. This includes the one off fee for purchasing a negotiation lease. The leases can be up to 99-years although most are around 50-year terms. In many cases, you will be charged between 10-15% of your property's assessed value for this fee. This cost can be offset by the savings you incur when renting real estate.
- The original purchase price is likely to be lower than the market rate for your chosen property. In some cases, you could potentially pay less than the current rent due to a landlord requesting that you pay the previous tenant's last year's rent as a deposit at the time of exchange. This can help reduce your upfront closing costs and purchasing costs.
- There is no need to make capital improvements such as plumbing, electrics or constructions before renting it out as long as these can be easily made. This reduces your initial costs and you can use this money to invest elsewhere. It is important though that you ensure that these improvements are carried out in good time for when you decide to sell your property on leased land.
- You will be able to invest in property without having to take out any loans as the negotiation lease used for purchasing is a cash purchase. This means there should be no debt if you are looking to avoid taking on a significant amount of debt.
- You are able to lease the property back from your real estate agent or company at market rates, potentially getting you more rent money.
Cons of Buying Property on Leased Land:
- There is no way of knowing whether or not there is a lease until you purchase your property on leased land. It can be a tricky situation to resolve. If there is no lease in place, the original owner may end up receiving no rent for his property and may not receive any money from the sale. It would then be down to you to find another buyer who would be willing to take on the property with no guaranteed rental income.
- You will have to pay additional fees when you sell your property as there will be a large number of tenant's leases involved in your sale, which means that it could take a considerable amount of time to complete. Not only this but you will also have to find a buyer who is willing to rent out other properties that are part of their own portfolios or are renting elsewhere. Finding a buyer who is able to fulfill these criteria may be difficult.
- As the seller of the property, it is important that you are aware of all the terms and conditions involved in your lease including when they expire. This is especially important because many leases vary depending on which state you are in which can mean having to make changes to your contract if these terms change. It is also very important that you ensure that you obtain an up-to-date copy of the lease each time it changes as this can be a crucial part of having an agreement with your new tenants. If anything changes, then you may need to make changes to your lease as well.
- There is a possibility that the property will become vacant as the lease expires. This is as you will not be able to sell it until all of the leases have been transferred over to your new tenants. It is possible for this to take considerably longer than 30 days. This can leave you without relevant income for a significant amount of time which may put you in a negative position with regards to your overall financial situation.
- You are unable to use the property yourself as you are unable to rent it out until all of the leases have been signed over by you and by your tenants. This can severely restrict you as some may see your property as a bargain while others may find it to be quite expensive due to the number of tenants involved.
Takeaway
These are some of the main pros and cons associated with buying property on leased land. If you are serious about becoming a landlord, please take the time to discuss these points thoroughly with an agent or company and make sure that you weigh up whether or not it will be worth your while before making a purchase. This will allow you to make an informed decision about whether or not this type of property is the right one for you. If you are only looking to invest in property for short-term profits, then it may be advisable that you consider purchasing an existing home and renting it out instead. Before making any decisions regarding real estate investment, it is important to consider all options carefully so that you can avoid making costly mistakes later on down the road.
