Differences Between Fee Simple vs. Leasehold

Fee simple and leasehold are two important types of property ownership . Fee simple gives full ownership rights, while leasehold comes with more restrictions, similar to a rental agreement. Knowing the key differences between both types could help you make informed decisions, whether you are building a real estate portfolio on your own or working with a real estate advisor.

If you want to build a real estate portfolio, a financial advisor can help you analyze and manage investments.

What Does Fee Simple Mean?

Fee simple is the most complete form of property ownership available under the law. When you hold a property in fee simple, you possess full and unconditional ownership rights to both the land and any structures on it. This ownership includes the right to use the property as you see fit, subject to local zoning laws and regulations, whether that involves living on it, leasing it out or selling it.

You should also note that fee simple ownership is indefinite, which means there is no expiration date on the rights, so they can be passed down to heirs upon the owner's death. This makes it the most desirable and common form of buying land in the United States.

The fee simple title also carries responsibilities. As the owner, you are liable for property taxes , maintenance and any legal obligations related to the property. However, these responsibilities are generally considered a fair trade-off for the autonomy and security that come with fee simple ownership.

What Does Leasehold Mean?

Leasehold is a type of property ownership that grants the right to use and occupy land or buildings for a specified period, rather than owning the property outright. When you hold a leasehold interest, you enter into a contractual agreement with the property owner, known as the lessor, who retains ownership of the land. The lease agreement typically outlines the length of the lease and any restrictions on the use of the property.

Leasehold typically involves ongoing obligations such as paying rent, maintenance fees and adhering to the terms set by the lessor. During the lease period, the leaseholder has the right to use the property as agreed upon in the lease terms. This can include living in the property, charging rent to tenants or operating a business on it. However, significant alterations or developments usually require the lessor’s consent.

Leaseholds are common in areas where land is highly valuable or scarce, such as in urban centers or regions with historical significance. In some cases, leases can be long-term, spanning several decades, but the property ultimately reverts to the lessor when the lease expires. For those considering a leasehold property, it’s important to thoroughly understand the lease terms and the potential financial implications over time.

3 Major Differences Between Fee Simple and Leasehold

• Ownership duration: Fee simple ownership is indefinite, meaning you own the property and the land beneath it with no time limit. Leasehold ownership is a temporary, specified period outlined in the lease agreement. Once the lease expires and isn't renewed the property reverts to the landowner.
• Control over property: With fee simple ownership, you have full control over the property, including the right to sell, lease or bequeath it to heirs. Leasehold ownership, however, limits your control. Significant modifications or subleasing often require the landowner’s approval and your rights are governed by the lease terms.
• Financial implications: Fee simple properties tend to retain or appreciate in value over time, making them a solid long-term asset in your investment portfolio . Leasehold properties, on the other hand, may depreciate as the lease term decreases and often come with additional costs such as ground rent and maintenance fees.

Bottom Line

Fee simple offers full ownership with control over the property, while leasehold comes with limits set by the property owner and fixed terms. Understanding these key differences will help you choose between long-term ownership or more flexibility based on your financial goals. If you are unsure, consulting a financial advisor can help guide your decision.

Tips for Real Estate Investment

• A financial advisor can work with you to build a real estate portfolio based on your investment goals and level of risk. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Another key expense that you should factor into your real estate investments is property taxes. SmartAsset's free property tax calculator could help you determine how much you could owe in taxes .
• If you want to calculate how much your investments could grow over time, SmartAsset's free calculator could help you get an estimate .

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