Most landlords are intimately familiar with lease terms, whether they offer them for six months, one year, or two years – the most common timeframes for a rental lease. However, there’s an extended lease option, known as a leasehold, that may be worth consideration as well.
What is a leasehold?
In a nutshell, it’s a lease with a contract that allows a tenant to stay in the property for at least 40 years, which is the minimum amount of time you’ll typically find in such a contract. It’s agreeing to allow your tenant to make the property home for decades, sometimes even a century or more.
If that timeframe makes you balk, you should know that there’s more to it than that. You may be wondering why any landlord would choose to turn over their property for such a long period of time, but there are some very good reasons to do so. When you grant a tenant a leasehold, it’s like you’re bridging the gap between renting and home ownership. Technically the property is still yours, and as the property owner you retain certain rights, but you’re agreeing to let the tenant more or less call it home for as long as they wish. That means that you’re more likely to attract a serious long-term tenant, such as a family with school-age children, and that means a steady income for the duration of the contract for that property.
Another difference between rentals and leaseholds is that a leasehold typically requires a larger down payment, more like a home purchase than a rental. Instead of putting down a security deposit and the first month’s rent, you work with the lessee to get a significant payment on the property. While this down payment is usually considerably less than a down payment for a house, it’s still a nice upfront payment for the landlord. Afterward, tenants will pay monthly rent to the property owner as normal.
More Tenant Freedom
When tenants rent a property under a leasehold, they’re typically granted a lot more freedom to do as they wish with the property. That includes renovations, additions, and improvements. However, any improvements made to the property will ultimately fall back to the property owner at the end of the leasehold, which means the tenant will not see a return on those costs. Most of the time, tenants may choose to do minor cosmetic improvements, but major renovations are atypical. But still possible!
One more major factor to consider is that a leaseholder can choose to sell their leasehold contract to another tenant without your input or permission. The new tenant is purchasing the remaining time on the contract, and you will have no say in the purchase. However, this is uncommon, as unlike home ownership, a tenant will not being gaining or earning any sort of equity in the deal.
These contracts aren’t common, and you’re more likely to find them in smaller, more exclusive communities where land is at a premium, or for condominiums. Business and retail rentals are another typical source of leasehold contracts. A major appeal for tenants looking into this sort of property is that the rent will be fixed – you won’t be able to raise it between lease terms. Ultimately, the reasons to consider a leasehold as a landlord is not having to worry about making sure the unit is always occupied and receiving regular monthly payments for several decades. If that sounds like it would be ideal for one or more of your properties, it may be something to consider.
For this type of contract or any other leases you maintain, we recommend our RentalConnect program as an added tool for selecting the right tenants for your property. RentalConnect offers property owners and landlords a great alternative to the expense of full tenant screening. This service requires no on-site visit, sign-up, or membership fees, making it extra convenient. The service fee is paid by the applicant. Available 24/7, RentalConnect is fast, easy, secure, and delivers reports needed to make an informed decision, including a credit report, a national criminal search, and a national eviction search. It’s ideal for condos.
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