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Income from a lease (confusing)

U

uktous

Member
Hi,

I have no idea about the cashflows for a lease.
I think I got 3 questions.

Question 1
Coursenote2009, Chapter16, page8, line26
Why the leasehold investment will provide a higher initial yield?

Question 2
If I am a leaseholder, will I receive any income from the lease?
If yes, can you list the items?

Question 3
If I am a leaseholder, I need to pay a “annual ground rent” to the freeholder.
Will this annual ground rate fixed in money term or vary over time?


Finally, if possible, can you list few main cashflow items for a leasehold investment?
 
Last edited by a moderator:
A lease (leasehold property) is simply an investment in property. The leasehold part is just an extra characteristic (vs freehold).

1. Generally speaking, a leasehold property should have a higher initial (income) yield compared to a freehold since the lease will expire at some point with zero value. Think of the capital growth under freehold being higher (since it will always have value) so all other things being equal, the income yield will be higher since capital yield is lower.

2. The lease is just an investment in property, so the main income is rent. Typically you own the property, develop it/maintain it and rent it out. This is your cash flow. Even if you occupy the property yourself you get a notional rent, ie the opportunity cost saved by using your own property.
There may also be a capital gain on sale.

3. I imagine that the ground rent could vary from contract to contract (especially as we are not dealing with the specifics of any territory). My guess is a "fixed rate" with fairly infrequent rent reviews.

Cashflows
Out - Purchase price
Ground rent
Maintenance
Possibly taxes

In - Rent
Sale value
 
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