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When you buy a house under a ground lease, there is one major difference from a typical residential real estate transaction: you do not own the land on which the house is built.
With a land lease, also called ground lease, you only own the house while you lease the land from a landlord, who can be an individual or a business.
Land leases are much more common with commercial properties, but there are some situations where they are also used for residences. A residential land lease may seem more ideal for a mobile home, as you can move the house at the end of the lease. However, there are also single-family homes, such as coastal vacation getaways, on land that has been leased for many years.
Types of Land Lease Agreements
The two main types of land leases are subordinated and non-subordinated, although non-subordinated leases are much more common as they give more rights to the owner of the land.
In a non-subordinated lease, the landlord retains absolute priority of land claims even if the tenant defaults on a loan for improvements. This could make it harder for someone to get mortgage financing to build or improve a home on that land.
In a subordinate lease, however, the landlord takes a lower position for claims on the property if the tenant defaults on the mortgage, which can jeopardize the equity in the home. The landowner can also increase the rental rate to offset the risk in this scenario.
Advantages and disadvantages of a ground lease
Here is an overview of the advantages and disadvantages of a ground lease.
Buying a home on a rental property could cost less than buying a single-family home because you’re not paying for the land. Also, if you are going to live in a property on the land and possibly improve it, you can try to get an agreement on the cost of the lease.
You may also avoid paying the entire property tax bill each year, but it depends on how much the landlord wants to charge you for this expense. You may be asked to pay this as part of your contract.
If you’re moving into a land lease community, you might get amenities like a recreation center or swimming pool as part of the overall cost of living.
However, land lease agreements have some drawbacks. A lender might not want to give you a mortgage on an unsubordinated lease if they have fewer rights to recover their investment than the landowner.
You also may not know if there are any environmental issues with the land or where potential encroachments on the property are, for example.
Another risk is that if the lease is in effect, landlords may evict you from the property. If you know when a lease period ends, either for your agreement with the landowner or for the landowner’s personal lease, you can try to prepare for what will happen next. But it takes a lot of money and time to plan and execute a move. This can be a major problem if you are not prepared for it.
How do I find land to rent?
Finding land you can rent out will largely depend on what you plan to do on the property.
There are many brokers and individuals selling land for hunting, fishing, farming and more.
You can also search for land lease communities, which may include manufactured homes and/or retirement communities.
Additionally, you can inquire with real estate brokers and/or search for single-family homes that have land rental arrangements, such as vacation properties.
Renting land or buying a house
While there are some advantages to renting land, you might find it too complicated, expensive, or very similar to renting a house.
The goal of a typical home purchase is to take advantage of, or improve upon, the existing home and surrounding property so that the overall value can appreciate for years to come. While you may spend a lot of money upfront on the home and on the work in progress, you might see that investment pay off when you sell.
However, if you own a home on rented land, you may be restricted from making improvements, and the home’s ground lease may make it more difficult to sell to potential buyers. You could save money upfront with a land lease property, but you may not earn as much on the investment because you are not building the same amount of equity as you could in a home purchase. traditional house.
It’s worth seeking advice early on from real estate experts and lenders who can guide you through the best options for your lifestyle and budget.
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