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May 9, 2010
Why Invest In Ground Rents
Ground Rent provide a unique opportunity to investors, as they can allow direct exposure to the real estate market at a much lower entry point than typical residential or commercial investments.
Ground rents can be both dry and active investments, depending on the type of ground rent you buy and your appetite to actively manage the asset.
There are four main angles of opportunity to investors:
- Lease extensions – As the lease gets shorter, the ability to mortgage the property declines because banks do not want to lend against an asset that could revert to the freeholders before the investment has been paid back. The value of the ground rent investment also rises. A few years before reversion, a ground rent holder can seek a lump sum from the leaseholder in return for an extension of the lease.
- Development – As freeholder of the property many investors have managed to get planning for extensions or extra floors on the building.
- Active management – Some ground rents state, “that the leaseholder must obtain consent of the freeholder if he wants to conduct any refurbishment of the property,’ Therefore the landlord can seek a financial incentive.
- Insurance commission – The freeholder under their management role can negotiate a commission with the insurance company of his choice typically 10%-20% of the annual premium.
Nonetheless caution should be taken when purchasing ground rents as their can be repairing obligations on the freeholder which may be punitive.