Ground rent is an agreement available in some markets that enables property owners to retain ownership of land while selling the physical dwelling located on the property. It is a situation where buyer and seller are also landlord and tenant. The tenant who purchases the structure on the property pays rent to the landlord for the right to use the plot of land.
What You Need to Know About Ground Rent
Ground rent isn't necessarily as simple as keeping land ownership while selling a house. For the buyer/renter, a ground rent lease can go on forever if they choose. However, the caveat is that the buyer/renter only retains legal ownership of the property on the condition that they pay ground rent. Under a system called "reversionary interest" in a property, the technical owner of the property cannot make a legal claim to the property as long as the ground rent is paid.
If a buyer/tenant does not pay ground rent, it is possible for the property and home to revert back to the owner of the land. In many cities, the buyer can actually "redeem" the ground rent expense by paying it off in full. However, the owner can never force the buyer to do this.
It's also important to know that the renter is responsible for property taxes for both the home and parcel in a ground-rent situation. In some cases, the IRS allows renters to deduct ground rent as mortgage interest.
How to Calculate Ground Rent
Technically, a landlord can charge any amount of ground rent they choose. However, this is typically a very small fee. Ground rent is calculated based on a single annual fee. Tenants are usually able to pay the total rent in semiannual installments.
A Quick Ground Rent Calculator
It's easiest to determine ground rent based on the square footage of a property. The actual amount of ground rent charged is up to the landlord in most cases. If you're attempting to sell your home using a ground-rent agreement, it's best to keep the rent charge to a minimum to make the agreement appealing to potential buyers. Charging too much ground rent makes your home less competitive than other homes on the market that transfer the rights to the yard over at closing.
Here's a quick ground rent calculator blueprint:
- Measure the dimensions of your land. You can use either your own measuring tools or pay to have the land surveyed.
- Next, create a sketch of the parcel with all of the dimensions written in.
- Add all of the dimensions to get the total square footage of the parcel.
- Determine a rental price per square foot that you think is fair.
- Multiply the amount per square foot by the actual square footage of your property.
Choosing the Ground Rent Amount
You should now have the full amount of ground rent that you'll charge annually for your property. Of course, choosing the amount that you'd like to charge tenants to use your land is a little tricky. You should consider speaking with a real estate agent in your area to get an idea of what's considered a "competitive" rate in your area.
Ground rent tends to be very low. The purpose of ground rent isn't necessarily to earn money from the land, but rather the value of a ground-rent agreement for the landlord/seller is that they get to retain the rights to the land that they own while still making a profit by selling the housing structure on the property. Trying to turn land rent into a money-making channel will almost always backfire because buyers won't be interested in purchasing homes that come with high ground rent. This makes your home noncompetitive in the market.
A reasonable price for ground rent in most markets 1 cent per square foot of land. If your parcel is 15,000 square feet, you would use a ground rent calculator equation to multiply 0.01 by 15,000 to charge your buyer/tenant an annual ground rent of $150. You will likely divide the rent into two payments of $75.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.