What Is a Life Lease? Understanding This Housing Option

As you’ve explored options for your downsizing move, you may have encountered the term “life lease” a time or two. Life leases are pretty common in the senior housing world, yet many people don’t have a good understanding of what they are and whether or not they present a good option for housing when you downsize.

What is a Life Lease?

A life lease is a contract that allows you to lease a property for the rest of your life. It is not quite the same as renting and it is not the same as buying. It feels more like an in-between of both of those options. Technically, it is more like renting, because it’s a lease.

How Does a Life Lease Work?

To understand life leases, I find it best to outline the most typical scenario. A senior community may offer their units through life lease. The community charges the prospective occupant an entrance fee. This entrance fee is the upfront cost to “buy into” the community.* Once the prospective occupant pays that fee, they retain the exclusive right to enjoy the unit, just like they would if they lived in a home they rented. They retain that right until they move or pass away. Once they move or pass away, the unit becomes available again and the occupant (or estate of the occupant, if the occupant has passed away) will be reimbursed a portion of the initial entrance fee. The reimbursement percentage is determined by the life lease contract that was signed. 

*It is also important to note that, in addition to the entrance fee, communities usually have additional monthly fees they charge occupants.

Let’s put the above scenario into some concrete numbers. Let’s say your life lease entrance fee is $300,000. Before you can move in, you pay your $300,000. You might live in the home for 2 years, 10 years, 20 years, etc. Regardless of the length of time you occupy the property, you will only have a set portion of your initial entrance fee returned to you when you move or pass away. For the sake of our example scenario, let’s imagine that this particular community returns 85% of the entrance fee. Once you move or pass away, you will have $255,000 returned to you. Most commonly, the percentage of your initial entrance fee that will be returned will be between 80-95%. This payout will be issued to you or your estate once the unit is re-leased.

There are other life lease investment models but the one outlined above is the most common you might see out in the market.

Life leases are a great option for some people. Others might feel like the potential negative depreciation of their entrance fee investment isn’t a smart choice. Keep in mind, with a life-lease, you usually don’t have to take care of your roof, furnace, etc, so you could save a lot of money in that regard over traditional homeownership. 

Because a life lease is a lease, it might have rules about changes you can and cannot make to the unit. You might have to get permission to paint your walls or change your flooring.

Each life lease contract is different. If you are considering a life lease, make sure that you read the contract thoroughly before you sign. It could even be a good idea to involve an attorney and/or family member in the conversation. And of course, spend some time exploring the community and meeting the people that live there so you can make sure you’re not only comfortable with the unit but also comfortable with the environment and culture of the community.