Imagine an investment property that you could buy for a fraction of its market price and collect rent on, all without the hassle of having to pay the ongoing costs of being a landlord. If this seems too good to be true, you need only look to our friends in the Aloha State to see that this is 100% possible…and you don’t have to live in Hawaii to take full advantage.
Interested in learning more about Hawaiian real estate with your retirement plan? Contact Dan Falardeau in our Hawaiian office today!
Let’s cover some background information before exploring the intriguing world of leased-fee interests, an investment avenue that can be far less technical than it sounds and more lucrative than you may expect.
A Hawaiian real estate investor will see one of three options when browsing properties:
This describes what one might consider a standard real estate transaction. A property is purchased, owned, and ideally appreciates over time. Owning real estate Fee Simple means incurring the usual expenses as well as having to pay a mortgage, if applicable.
In addition to paying for the property and the ongoing costs of homeownership, purchasing a leasehold property means paying additional rent to the company that developed the land on which the property sits. These leases can last up to 60 years.
This leasehold arrangement allows for the property owner to purchase the lease from the developer, at which point the owner would obtain the property on a Fee Simple basis and no longer have to make additional payments.
Rather than buying a property with a lease on top, investors have the unique opportunity to purchase the lease alone. This is called investing in a leased-fee interest. If tenants decline the option to purchase their own lease, it may be put up for sale to investors.
By purchasing the lease without also paying for the property itself, the investor—or his or her self-directed retirement plan—can enjoy the remarkable trifecta of:
This example case study illustrates how this can work for your self-directed IRA, 401(k), or Health Savings Account:
Obviously, a 20-year wait for a return on investment is considerable, but so is tripling a sizable investment. Leased-fee interests present the chance to invest in real estate without having to contend with property management issues. You also won’t have to submit annual fair market valuations for leased-fee interests because the asset itself will be valued the same until the lease expires.
As with any rental arrangement, there’s always the risk that your Leasehold tenant will default. However, if this happens, the lease may be terminated for breach of contract, at which point your account will own the property sooner. This is less than ideal, but it is at least secure. Your tax-advantaged plan comes away with real property even in the worst-case scenario.
Leased-fee interests are not widely known outside of the Hawaii real estate market, nor are they limited to Hawaiian residents. Register for our upcoming webinar, Investing in Hawaiian Real Estate - Leased-Fee Interests, to learn more about this fascinating investment approach.
You’re also welcome to give Dan and our Hawaii office a call at 808-521-4472.