Leasehold real estate can provide the home you could never afford, but with big caveats

Shirley Shen and her husband were living in a little studio apartment in Vancouver when they had their first child. It didn’t take long before they decided they needed a larger home.

But the city’s pricey housing market left them few options. Two-bedroom apartments in their Olympic Village neighbourhood were selling for $2.5-million. Rent for similar styles of housing was unattainably expensive.

So Ms. Shen started looking into options for leasehold properties in the area. Eventually, they landed a three-bedroom townhouse in 2019 for below $1-million in False Creek, a central neighbourhood. The caveat: They’d only have the property for 18 years, and would have to negotiate a lease extension that could cost hundreds of thousands of dollars after that point.

Unlike conventional freehold homes where a purchaser buys the land and the home in perpetuity, leaseholds are a form of ownership for a defined period of time from either the government, an Indigenous band or a land trust. Leases are often issued for 99 years, and at the end of the term, the two parties can extend the lease through some form of negotiation.

Terms vary, but Ms. Shen’s family renewed the lease for roughly 20 years for around $200,000 – much lower than their purchase price.

While such arrangements are more common in Europe and Asia, they’re scant in Canada and often only available in some towns or for specific types of real estate, such as vacation homes. The Vancouver area is an exception, where certain neighbourhoods such as False Creek South and Champlain Heights have large communities mostly comprised of leaseholds owned by the City of Vancouver.

Other leaseholds exist on land owned by the University of British Columbia and Simon Fraser University, where the leases are managed by a trust. A consortium of three Vancouver-area Indigenous nations recently proposed a 13,000-unit development that would include leasehold properties, along with rental and social housing.

For people who can’t otherwise afford to buy their first home or a larger home for a growing family, leaseholds can be an enticing option. But they also come with hefty challenges when it comes to securing a mortgage, missing out on appreciation and having some uncertainty around the terms of renewing the lease when it expires.

Real estate agent Jark Krysinski said he fields lots of calls from people who are attracted to the low list prices of leaseholds. One-bedroom condos in Vancouver’s sought-after West End neighbourhood can be found for around $300,000 with a few decades left on their leases, and larger units and townhouses can still be found below $1-million with around 20 years left. Most original leasehold agreements in Vancouver run from 60 to 99 years, but properties on the market today are usually reselling an original contract.

Mr. Krysinski said these types of homes can often be better than living in a rental, as long as buyers have enough money set aside to pay for any maintenance cash calls that may arise for communal condo repairs.

“If you’re simply factoring in that you could be paying someone else’s mortgage off in a basement suite or could be living in your own leasehold and paying off your own asset and the total payment would be roughly the same … a portion still goes into your pocket,” he said.

“It’s way better than living in a rental because I have nothing to show for that rent – I’m paying off my landlord’s property.”

But Mr. Krysinski said he’s quick to warn clients about all the disadvantages and risks of leaseholds when compared to freehold homes. For one, leaseholds generally appreciate in value very little, because any gain in property value is mitigated by the reduction in a lease’s life.

In data the agent provided, the median sale price of leasehold apartments in the UBC area has gone from just above $600,000 in the first quarter of 2013 to roughly $1-million in the first quarter of 2023.

It’s a formidable amount of growth for an asset with finite ownership. But Mr. Krysinski still contests that it’s much smaller than someone would experience if they were able to find a freehold home they could afford.

The other main issue with leaseholds is that financing them can be difficult. Many leasehold properties in Vancouver have fewer than 30 years left on their contracts, which can be an issue for people who want to get a mortgage at the standard 25-year amortization period.

Mortgage broker Pauline Tonkin said that mortgage providers will only approve amortization periods that are five years greater than the life of a lease. A shorter amortization could lead to entirely unaffordable monthly payments for buyers.

Mr. Krysinski said lenders can also require much larger down payments, ranging from at least 10 per cent to upward of 30 per cent. In Ms. Shen’s case, securing financing was so difficult that the only reason she was able to purchase the home was because her family stepped in to mostly purchase the place with cash, along with the money from selling her studio apartment.

Meanwhile, Ms. Tonkin said buyers who hope to maximize their growth need to aim for properties that have the most life remaining on their lease. She said selling a leasehold can become very difficult when their life dwindles below 30 years, since buyers will struggle to get financing and can find the uncertainty of renewals unappealing.

“If it’s getting into the 30-year range, I would talk to my clients about considering other options,” Ms. Tonkin said.

There’s a particular demographic that comes to mind when Mr. Krysinski thinks of ideal leasehold buyers: new families in dire need of new space. For Ms. Shen, a leasehold provided a much-needed stepping stone to that end. Her family had much more space than they could generally afford, in a downtown neighbourhood with a dreamy lifestyle.

Ms. Shen’s family ended up moving to live with her family in Vancouver’s suburbs after two years, but that was only because finding child care in their neighbourhood was impossible. If not for that challenge, she said her family would probably still be in a leasehold, even though the long-term financial benefits are more slim.

Ms. Shen and her husband still own the leasehold townhome in False Creek, which has become a surprisingly lucrative rental property.

Another thing Ms. Shen especially loved about the leasehold is that the profitability of homes wasn’t the foremost priority, which seemed to make for a more grounded community that planned to stay for most of their lives.

“There’s something really special about this particular neighbourhood, because everyone wasn’t a speculative person, they were long-term residents and … it was nothing like you’d experience in a rental building where there’s lots of turnover,” Ms. Shen said.

“I think the people who appreciate that don’t see the downside to the leasehold, and most of our neighbours are still there, and they’re still going to pay the extension and stay there. They’re all in.”

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