How much do ground rents really cost home buyers?

As a clarification, this only applies to the "ground rent" as it is known and loved in Baltimore City, Maryland...

After years of practice in Baltimore area, it seems that the ground rent only becomes an issue, when it in fact becomes an issue... otherwise, it is just treated as "just the way things are". Many realtors will tell you that having a ground rent does not detract from the value of the house. Of course, that's only partially true.

The truth is ground rents LOWER the resale value of homes, though in practice a home with a ground rent may have a contract price the same as homes without ground rents (i.e. good 'ol fee simple ownership). But in a tight market, that assumption may no longer be true.

So, it pays to know what a ground rent is actually worth.

What is a ground rent worth? There is a simple enough formula:

(1) Determine the redemption (payoff) amount of the ground rent.

(2) Subtract the ground rent redemption amount from the sales price.

Example: $100,000 house with a $90 ground rent.

Most ground rents are capitalized at 6%, so the formula looks like this:

$90/.06 = $1,500.00

$100,000 - $1,500.00 = $98,500.00

Thus, had the property not been subject to the $90 ground rent, it would be worth $1,500 more.

Happy Landlords -- Hard to Find?

The doom and gloom surrounding the real estate market (and more than a few posts on this blog) leave out a lot of the positive (for some):
* Fewer mortgages mean more renters.
* More renters mean fewer vacancies.
* Fewer vacancies equals higher rents.

Rents have risen nationally over 1% - some areas near 2% (Says Wall Street Journal and Reis, Inc.)

Of course - you have to have a house or apartment someone wants to actually live in to take advantage of this. An additional 1-2% is not going to make most landlords rich however, so you still need a good property manager -- or a working system if you do it yourself.

Rising rents are not helpful to owners who have deferred maintenance & repairs, who have feature-less units (especially to landlords who think things like refrigerators, dishwashers, clothes washers, etc. are optional), or those legions who simply paid too much during market run up and cannot increase rent enough to cover carrying costs.

To those who have units that are tenant-ready, survey your local market and raise those rents!

New Competition for Struggling Landlords

"Room For Rent" signs and classified ads and online ads for housemates are cropping up seemingly everywhere. It appears that people are not just looking for roommates... These are people taking on boarders to make ends meet or otherwise pay down that adjustable loan reset.

If a new trend it could easily cause a drag on rentals of one-bedroom apartments, efficiencies and rooming houses. As the cost of living continually ratchets up, this sort of living arrangement is likely to increase.

Perhaps attorneys can pick up on this trend through drafting home sharing agreements for boarders and roomers, and for drafting tenant-in-common agreements as people add names of relatives and very close friends to their deed for refinancing and escaping foreclosure purposes.

Landlords be wary...