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Our Latest Newsletter

Our seminars are booking fast with seasoned as well as neophyte investors looking for new insights and ideas either to enter or continue with their investment careers. This leads me to the latest newsletter topic:

Ground Rents, The Hidden Profit Center

This topic is covered entirely in our live seminar and is also available on tape or CD sets. Just call us at 1-866-855-7480 to order your copy, or order online at http://www.baltimorecasfhlowrentals.com.

So let's get started.

WHAT IS GROUND RENT AND WHO PAYS IT?

Ground rent is very common in Baltimore City. It means you own the house but someone else owns the actual property that the house or any other improvement sits on,and with that you must pay the owner rent on the land.

HISTORY OF GROUND RENTS

Dating back to the 18th century,the ground rent system kept initial costs low on building housing as it allowed the developer to acquire the land on which to speculate for no cost.The house could be under construction and already sold to an owner before the first ground rent payment was due.

Baltimore ground rents quickly became highly negotiable investments in a time when savings accounts paid 2-3 percent. Ground rents were considered dependable 6 percent investments secured by the land and a first lien. If a householder defaults on the ground rent,the landlord has the right to take both the land and the house. Although this does not happen often as an individual would not risk losing their house over a minor annual payment.

WHO PAYS GROUND RENT?

Whoever owns a structure on a property with a ground rent lease. When a property is listed on the MLS system it should note if there are any additional fees with that house; fee simple which means the property is included in the sales price or ground rent.In most cases the ground rent will range from 38 dollars to 360 dollars per year.

FINDING THE GROUND RENT OWNER

You can often find the ground rent owner from the seller or you can research the title to the property at closing. Your title company might discover this information or you can go to the court house and check with the recorder of deeds and they can manually look it up. Many of these records are very old and sometimes this lease paperwork gets lost or the contact name cannot be found. The additional paperwork should be attached to the recorded title. Trying to find the person can sometimes be the hardest part.

You obviously cannot pay a bill to someone you cannot find. If this person is still alive and they want to get paid, they will eventually come to you. Your property is the one address that does not change in this process.

If you buy a property that is noted as having a ground rent,but you cannot find that person, your mortgage company may still want to escrow that fee amount.The most back ground rent that can ever be collected is 3 years . This means that if you have been there for 10 years and suddenly the ground rent lanlord demands payment, they can only collect 3 years and then ask you to pay forward. It is their responsibility to prove that they hold title to the property.

WANT TO BUY YOUR GROUND RENT?

The owner of the ground rent must sell this to you if you want to buy it. A purchase price is determined by taking the annual ground rent fee and dividing it by a range of 4%-12%. There are standard rates of redemption depending on the year the lease was created.

  • April 8,1884 to April 5, 1888 = 4% redemption
  • April 6, 1888 to July 1, 1982 = 6% redemption
  • July 2, 1982 or later = 12% redemption

There will also be nominal legal fees involved on filing that you will be responsible for paying.

The State of Maryland passed the Residential Ground Rent Redemption Law effective January 1, 2004 that allows the owner of single family residential property who is a tenant under the ground rent lease on that property to redeem the lease where there has been no communication from the lanlord for 3 years. For an application go to:
http://dat.maryland.gov/realproperty/Pages/Ground-Rent.aspx

Now that you have an understanding of the ground rent, let's see how we can make money with them with a few examples. By the way, this is a real example of a current ground rent that was redeemed when we bought the house.

The house was purchased and had a $35.00 yearly ground rent. As you can see, this is an older ground rent and is very inexpensive and is capitalized at the old 6% rate. A simple formula to use:

Chart1

This is the total cost of the ground rent when I called the owner of it and asked to purchase it. This is the total full value.

I asked if they would take a small discount in the price and they said no, so I paid $583.00, the asking price, and now owned the property in fee simple.

But being an investment property, I decided I wanted my own ground rent on it for profit, so I created a $360 per year ground rent on it. This cost was approximately $175.00 to do the paperwork. (Prices vary with different title people.)

Therefore my total cost to buy this old ground rent and create my new ground rent was $583 cost + $175 to create = $785 total.

Now let's play back in the formula:

Chart2

And it gets better. Since you own the house your ground rent will be in first position when you sell the house, ahead of any new mortgage. So they must pay or you foreclose on the property.

Let's look at a future owner of the house who wants to buy this ground rent and have an in-fee property. Ground rent worth after your creation:

Chart3

This is the value of this ground rent:

$3,000 - your total cost $758 = $2242 profit when you sell, or you can discount to buyer and still make a good profit.

This is just one example of the profitability of ground rents. It is even better when you purchase a property in fee simple and create for just the attorneys' and recording fees. Example:

Chart4

Small investment, but do it with every property you buy and it can add up. Better yet, purchase these with your Roth IRA and pay no tax on any return.

Sign up for one of our Seminars and you will learn a few other ways of buying and selling ground rents for profit and fun.

See you next time, and may your rent rolls always be profitable,

Bill Fell

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