www.InvestmentGuide.co.uk

Other types of direct Property Investment

PROPERTY

Ground Rents

You buy thefreehold of residential property (i.e. houses and blocks of flats) or commercial property (i.e. shops, offices, warehouses, factories) which are already let on a long lease with many years still to run (usually 30 to 125 years). You usually receive a fixed low rent in relation to the value of the building and, if you are responsible for the insurance of the building, you can receive commission on the insurance premium. Tenants either occupy the property or let it to other tenants. You can either hold the ground rents for income or hope to sell to individual tenants or to a group of them at a profit.

With residential property tenants have the right to extend their lease (flats) or buy the freehold (houses) at the market value. Sometimes you have the duty to organise the insurance and maintenance of the property.

Who can invest Anyone 18 or over.

How worthwhile Potentially good value for non-taxpayers and 22% taxpayers because the income is usually high in relation to the investment and once you have bought the income does not fall when interest rates fall. With commercial property your children or grandchildren inherit the reversion, the right to demand the market rent, when the lease expires. With residential property there is currently money to be made by extending leases to individual tenants but the tenants with a long lease have the right to buy in preference to an outsider. Compare with Life Insurance Annuity. Unsuitable for higher rate taxpayers; consider Property Commercial Direct instead.

Minimum £250 for a £25 a year ground rent; £2,000 to £25,000 for a small block of 5 flats with ground rents of £50 a flat; £10,000 for a commercial property with a ground rent of £1,500 to £1,700 a year.

Maximum None.

Suitable Lump sums.

Money back Finding a buyer may not be easy. Often sold at auctions.

Interest You usually get a fixed income from the rent. If you are responsible for the insurance of the building, you can receive commission of 5% to 40% of the insurance premium; if the rebuilding value of the property or the premiums rise, so will your commission. The ground rent etc can be paid by standing order or you can employ managing agents to collect it and organise the insurance and maintenance, if applicable; they will charge around 10%-15% of the rent and act as a buffer between you and the tenants.

Interest paid Usually yearly, half-yearly or quarterly in advance.

Tax Rent after deduction of expenses (e.g. agent's fees and repairs not paid for by tenants) is liable to income tax. Basic taxpayers pay 22% tax on rental income. No tax is deducted unless you live abroad. You get full income tax relief on any interest paid on a loan to buy a property provided it is less than all your rents. See also tax on rents. When you sell or give the property away, the gain is liable to capital gains tax.

Fees to pay Legal costs when you buy would make most purchases not worthwhile: you would therefore have to do it yourself. Stamp duty is unlikely to apply unless you buy ground rents for a huge block of flats (stamp duty starts at purchases over £60,000). Estate agent's costs of management about 10-15% of rent. Possible auctioneer's costs when you sell of up to 5%.

Children Children can eventually benefit from the reversion. See also different types of trust you can set up.

Risk Moderate. The investment is not easily sold so you should only put in money you will never need in a hurry. If tenants stop paying rent, you may have extra legal expense.

How to invest Look for auctions in the newspapers and magazines like Estates Gazette.

Other types of Direct Property Investment
Contents
Get the whole site on Disc or by E Mail

Last updated 24 November 2004