Why not go for a ground rent?
A ground rent refers to freehold (or head leasehold) interests in the buildings with apartments sold out on long-term leases. You get not grand but fairly secure income, and often it goes with added benefits. Depending on those and added value potential, ground rents can be equal to 20 to 30 times the rent (often referred to as 20-30 years’ purchases), providing thus 3.3% to 5 % per annum. Modern ground rents often rise in price (usually twice) every 25 or 33 years. The income is quite secure and protected. If a lessee’s debt stretches above £ 350 or they do not pay the lease for 3 consecutive years, the landlord is entitled to confiscate the leased property (although the forfeit can be legally revoked once all arrears are satisfied). Remember that ground rent is subject to payments only if demanded. So competent managing is the key.
What is the deal here?
If a lease covers the building insurance for the landlord, there may be an opportunity for insurance to be placed through the investor’s brokerage and further income received through commission. Payments from tenants would then be recovered through service charges.
So when the landlord manages his block of apartments on his own, then he has the right to charge his lessees a reasonable management fee. But if lessees want the control over management for themselves, the law allows them to do that as stated by the Right to Manage company (under the Commonhold and Leasehold Reform Act 2002 2002).
Leases can be described as depreciating assets. The shorter they grow, the lower their cost is and the more the value of the freehold increases. Leases with a term period of less than 80 years might experience some difficulties in selling. Lenders do not like to take them as mortgage security. And that is when a freeholder can offer a lease extension and perhaps even negotiate an increase in ground rent.
Read the lease agreements carefully before buying. You might discover hidden extra value. For example, available roof spaces or lofts have a potential for the penthouse development (subject to planning permission). Or maybe there is a porter’s flat, but the landlord is not required to provide a keeper who reside in the building. The landlord may engage the services off site and thus fulfill his obligations, all while renting or having sold an additional unit.
Dealing with all kind real estate investments, the first and foremost thing to do is to do your research. And if you feel like you lack experience, it is worth to get the right advice. Contact us if you are in need of consultation and guidance.
