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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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You might have experience with leasing a car, but did you know you can also lease land for your home? A land lease involves a combination of buying a home and renting the land it sits on. This kind of agreement can be a less expensive route to homeownership, but also comes with drawbacks that warrant careful consideration. Here are the basics to know.
A land lease, also known as a ground lease, is an arrangement in which a landowner — the lessor, in legal terminology — rents out the land to a tenant, or the lessee. A land lease can be used to purchase a home plus land, or simply to purchase land that you plan to develop later on.
A land lease is common for commercial places of business, but many residential real estate property owners also pay to lease the land their homes are on — many co-ops in New York City, for example, were built on land leases.
There are two main types of land leases:
With a subordinated land lease, the landowner is at risk if the tenant defaults on the loan for their property. If the bank has to foreclose on the property, for example, it could have the right to take the land, too (in other words, the land is subordinated to the mortgage, so the lender has first claim to the property). An unsubordinated land lease, on the other hand, keeps the land and property separate, so in the event the tenant defaults, no one else can make a claim to the land.
“Most landowners today should not agree to subordinate except under the most compelling circumstances,” according to the American Bar Association.
Some mortgage lenders, however, might require subordination. In this case, the lessor could demand additional compensation or some other guarantee from the tenant.
If you’re on the tenant side and considering a land lease, be prepared to act as both a homeowner and a renter. You’ll need to secure a mortgage for the physical property (or pay all-cash if you can afford it), and account for what you’ll pay each year in lease and other fees. Some land-lease properties are part of homeowners associations, which means you’re responsible for paying dues, for instance.
Land leases are common mostly for manufactured housing and mobile homes. There are nearly 40,000 land-lease communities — also called mobile home or trailer parks — in the U.S., according to the Manufactured Housing Institute. However, you can find leasehold properties elsewhere, too. From retirement communities in California to high-rise buildings in New York City, leased-land living arrangements exist across the country.
If you’re looking for a leased-land property, a real estate agent is one of the best resources. Your agent should have a good idea of which properties in your area are attached to land leases.
A lower purchase price might be enticing, but the potential for unexpected increases in the cost of the land can quickly erase any financial gain. If you’re thinking about buying a home on leased land, consider:
“There are pros and cons to leased-land living,” explains Zach Wahls, Democratic state senator for Iowa’s 37th District and vice president of community investment and development at GreenState Credit Union. “However, I think it’s the rare exception when the pros outweigh the cons. Most people will be better off in a more traditional living arrangement whether they rent a home or own it.”
You could also consider exploring another type of arrangement, rent-to-own, which allows you to eventually own the property and the land underneath it.
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.
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