Freehold ground rent investment | few questions

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    Freehold ground rent investment | few questions

    Dear all,

    I do not have much experience with ground rents but wanted to start looking at it in detail. Couple initial questions that came to my mind

    1) What are the obligations of the landlord?

    2) I read that the landlord actually has to manage the building? If it is a small multi family home (3/4 flats), in reality what management is required?

    3) What are the operating expenses for the landlord?

    4) Is there a risk of potential capital expenditures? If yes, are they capped?

    5) Is it possible to be insured against any potential claims? Are there any potential scenarios / claims that are "uninsurable"

    6) What is the typical gross to net rental income leakage ?

    7) What happens at lease expiry? My understanding is that tenants usually have the right to renew against a fee. Is this correct? What if they did not want to renew? Would the landlord reposess the property?

    8) What happens if the leaseholder does not pay the rent? I reckon it might be a lenghy legal process, but would it be possible to apply for forfeiture of the lease?


    Thanks!

    #2
    What you have possibly not considered which is where a number of ground rent investors have went wrong is that if you own a mutli apartment building then you are the responsible person for the entire site. You are responsible for fire risk assessments, fire alarm testing, enforcing procedures for this........this is an incredibly tricky area which is what carries all of the risk in these kind of investments. Other things you may not of considered - The health and safety of any contractors on the building, H + S of and people visiting the building for example trips or falls in communal areas, anti social behavior management.

    The government is tightening up on the private letting sector in general especially around H+S and I think Freeholders are well in the governments eyes since they have basically been doing nothing over the last few years. If you are experienced in property management and have some HHSRS experience then this may be a good idea, if not I would stay well clear. I recently sold out of a freehold site I had purchased for this very reason as I figured the risk was far too high on my part for only a tiny amount of return from the ground rent/management.

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      #3
      Thank you.
      But technically everything around H&S can be insured (assuming that respective assessments / testing / maintenance has been carried out), correct? Also, who pays for this? The landlord or the leasholder?

      I am more concerned about the things that cannot be insured against and might become a big (financial) liability at some point in time.


      Mullis & Peake LLP Solicitors looks into who should pay the costs for replacing cladding, the landlord or the tenants?

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        #4
        I don't think you can insure against a criminal record!

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          #5
          The other thing to bear in mind is that the government is making a lot of noise about leasehold and ground rents, and you may find that the ground rent gets capped or eliminated.

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            #6
            Excuse me for saying so but if you have so little understanding of such a complex area as freehold ground rents, my advice would be that you should forget this kind of investing and do something else that you are more familiar with.

            Whilst other people on this site may advise you to simply delegate the day to day management of the building to a managing agent, the buck stops with you (the freeholder) for any errors or omissions the managing agent makes. Ideally you need to know more about leasehold law than any managing agent you employ so that you can pull them up if they are in danger of doing something wrong ...

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              #7
              You can insure against H & S? I wish you could. How could you possibly insure against your fire safety not being adequate? Someone dies in a fire, you got it wrong in some way - It is a criminal charge for manslaughter. It is like you are saying you can commit criminal behavior and insure against it

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                #8
                Lorimer,

                Thanks, you are right.
                You have to start somewhere.. I did not say I would invest right away. But there is nothing wrong with asking questions.

                Nonetheless, I have decided that - in my opinion - leaseholds do not provide sufficient risk adjusted returns, given my expertise in this field.

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