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LuckyOne

Ground Rent Yields Vs Rental Yields ........

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Looking through the Savillls residential catalogue (http://62.105.94.133/lond_Current_auction.asp), I noticed the last four lots which are the sale of ground rents.

Looking at lot 104, the annual ground rent is £ 1,625 at present and rising for 250 years from April 2005. It is for sale at a guide price of £ 18,000.

Assuming that it sells for the guide price, the discount rate being used is approximately 9% + the growth rate of ground rents (9% with no growth, 11% with 2% growth in ground rents etc).

Compared to a BTL using generous assumptions of a 4% rental yield after all voids and expenses, a 2% growth in rental income, you would need an 8.25% annual rate of price increases in the BTL to break even relative to buying ground rents with a 2% growth rate on a pre-tax, IRR basis (11% in both cases).

I have learned long ago that buying assets assuming that tax regimes will remain constant is a dangerous game. It would be foolhardy to assume that the treatment of capital gains will remain as favourable relative to other income as it is to-day. A purchase of ground rents could be financed in a similiar manner to a BTL so I don't think that interest deductability is an issue.

I freely admit that I don't know that much about ground rents but it seems to me that they are cheaper and lower risk than BTL even if they are possibly less liquid.

Does anyone have any views or thoughts?

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Looking through the Savillls residential catalogue (http://62.105.94.133/lond_Current_auction.asp), I noticed the last four lots which are the sale of ground rents.

Looking at lot 104, the annual ground rent is £ 1,625 at present and rising for 250 years from April 2005. It is for sale at a guide price of £ 18,000.

Assuming that it sells for the guide price, the discount rate being used is approximately 9% + the growth rate of ground rents (9% with no growth, 11% with 2% growth in ground rents etc).

Compared to a BTL using generous assumptions of a 4% rental yield after all voids and expenses, a 2% growth in rental income, you would need an 8.25% annual rate of price increases in the BTL to break even relative to buying ground rents with a 2% growth rate on a pre-tax, IRR basis (11% in both cases).

I have learned long ago that buying assets assuming that tax regimes will remain constant is a dangerous game. It would be foolhardy to assume that the treatment of capital gains will remain as favourable relative to other income as it is to-day. A purchase of ground rents could be financed in a similiar manner to a BTL so I don't think that interest deductability is an issue.

I freely admit that I don't know that much about ground rents but it seems to me that they are cheaper and lower risk than BTL even if they are possibly less liquid.

Does anyone have any views or thoughts?

surely, if the returns were good, bankers would buy them instead of other financial products.

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surely, if the returns were good, bankers would buy them instead of other financial products.

Surely the cost of administration of such small parcels of land would deter them?

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Surely the cost of administration of such small parcels of land would deter them?

Exactly. You're collecting a lot of very small individual payments. Twenty quid a year and you have to write a reminder, cash a cheque, record it - you're only going to make that pay if you discount your own time, or if you have a pretty good automated system. Add in those tenants who never pay until they get the red bill, or are just disorganised and forgetful ...

OK, that's the easy bits.

Now consider your responsibilities in terms of maintenance, etc. Honest ground-landlords largely got out of that business in the 1980s, as with tightened-up legislation, only the mafia could make a profit on it.

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Surely the cost of administration of such small parcels of land would deter them?

why, they deal in millions of bank accounts with little in them, sending out letters and statements.

Im sure one of the Amstrad Pcs, could thrash out a few statements once a year.

and of course, the asset is real.

The only problem is they would be using their own money to buy them.

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