Purchasing Ground Rents as an Investment.

Purchasing Ground Rents as an Investment.

Property investments and associated costs are expensive these days, especially with the Government’s Section 24 reform. Furthermore, the higher rate tax relief was abolished, and the stamp duty was raised by 3%. It just seems so expensive.

However, not every investment is costly. You just have to look into the right ones. A thing that should be noteworthy when it comes to deciding on where to put that money, are ground rents. Specifically, buying them. A common occurrence among landowners today is the setting up of flats and selling them off on long leases. This is a sure way to have a steady income, as the lease progresses. In addition, as the leases get shorter the future value is likely to increase.

Imagine, ground rents are priced at least 20 times or 30 times the paid. That is a yield equivalent to 3.3% up to 5% PA. Every 25 to 30 years, most modern ground rents double or increase by the Retail Price Index. All of these ensure a reliable stream of income, a good investment.

With ground rents, you won’t even have to worry with nonpayment. The moment the lessee accumulates a delinquency amounting to £350 within a span of three years, there is cause for legal action and the property could potentially be forfeited. However, you should be aware that courts have also been known to give relief for leaseholders who are able to update their accounts.

If you decide to go this way, you should always remember that ground rents are not required by the law but can be demanded by the freeholder. To have a lucrative freeholder business, good management is an essential. You should be able to handle your properties well for it to generate the desired income you choose.

Freehold Ground Rents - Victorian Conversion
Victorian villa converted in to flats.

If you are leaning towards buying ground rents, here are the things that could help you come to the right decision:

Building Insurance

Landlords can elect to insure their properties and include this in the lease. You can call for service charges as a lessee’s contribution with regards to the insurance.

Management

Building management can be taken up by the owner, if he or she is the hands-on type that wants to be involved in the business. The same can charge each lessee a reasonable amount in exchange for management services. You may call this their professional fee. However, if the lessees want to take control of management for themselves, they can also do this. According to the Commonhold and Leasehold Reform Act 2002, leaseholders are entitled to assume the managing duties on their own through a Right to Manage company.

Depreciating Assets

Evidently, leases are assets that depreciate over time which in turn, raises the value of the freehold. Flats with leases that have less than 80 years in their term become hard to sell. Even mortgaging becomes a difficult option where lenders are careful and do not consider them as worth their money. Occasionally freeholders negotiate lease extensions privately, allowing for a new ground rent and review to be introduced, ensuring a stable ongoing income.

Hidden value

When creating a lease, sometimes you may find opportunities for additional income. Look for parts that are not included in the lease. For example, there may be roofs or lofts that were not covered in the lease. You may be able to offer these spaces to leaseholders to allow for loft conversions, with a planning permission of course. In older developments there are some properties where the developer left a flat free for caretakers to live in. If the lease contract does not require the freeholders to provide a caretaker, then getting the services from a third party will free up that space, renovate and sell. Thus, additional income.

There are so many opportunities if you decide to invest in buying ground rent. When you do venture into it, don’t go blind. Do research or better yet, consult with us. Get the best advice from Sell My Ground Rents. Please feel free to give us a call on 0207 305 5825

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