Member Article

Understanding ground rent and ‘freehold investments’

Brendons Auctioneers, the London-based property auction house, give an explanation of ground rent and ‘freehold investments’.

With more and more buyers being attracted to property auctions as a route to purchase, largely due to the lack of affordable housing, auction houses, are often inundated with enquiries when advertising the “freehold investment” of a property. With prices for these often ranging from just £5,000 – £10,000 next to a picture of a three bedroom semi-detached property in London, the opportunity seems too good to be true.

If you ever see a substantial property advertised for around this amount then check in the details to see if it says it is the “Freehold Investment “ or “Freehold Ground Rent Interest”. It is extremely unlikely that a good quality property will be sold for this low price. However, it doesn’t mean that it will not be of interest. A ground rent investment can be a good long-term opportunity.

If the property seen advertised is a typical two storey house, it is more than likely that the property has been sub-divided into 2 or 3 leasehold flats. Leasehold means that the owner of the flat will have been granted a “temporary right” to live in the building for the length of the lease. This could be anywhere from 99 – 999 years. The freeholder is paid a “ground rent”, usually around £50 - £250 per annum, for allowing the lessee to live in his/her building. This is not a huge amount but the leaseholder is then responsible for the maintenance of the flat and building. Sometimes within the lease it specifies that the ground rent will increase after x, y, z, years, especially for a lease of 999 years.

At the end of the lease term, the building will revert back to the freeholder so the leaseholder cannot own the flat or house indefinitely. However, as the lease term decreases, the leaseholder may wish to increase their terms so that they, or their family, can continue to live there, and also to maintain the value of their property should they wish to sell on. In order to obtain an increase in their term, they will need to pay a premium to the landlord or freeholder. This premium is difficult to calculate and normally a surveyor will be employed to ascertain a just price. It could be between £8,000 – £20,000, or even above. And this is where your long-term investment for your future generations becomes of interest.

So, although you may not obtain a house to live in for £5,000, you may instead become the landlord of a substantial property that becomes a rather interesting long-term investment opportunity for your family or indeed your business.

This was posted in Bdaily's Members' News section by Ron Bell .