First Examine Situation Of Property

1. The observations already made upon the situation and surroundings of the property are most vital hero, since the investor's possible experience of vicissitudes is not limited to the brief currency of an advance, but extends as a perpetuity in freeholds, and for a considerable period where leaseholds are concerned. The possible adverse incidents are numerous and have already been described, but this fact simply suggests the greater caution and judgment in choosing the properties to be bought. Owing to the existence in leasehold premises of a ground-rent, the annually diminishing value, and the condition that the buildings must be restored at the expiration of the term in a reasonable state of repair (which frequently entails considerable expenditure), the investor should select freehold premises only. In no class of investments is a judicious scheme of distribution of risks - in these cases, geographical distribution - more important than here. If three or four houses in the same terrace or the same street, or even in the same neighbourhood, be bought, a decline of value in that position will affect the whole of the investments which might prove of serious moment to the owner. A description of these contingencies need not be furnished: changes in the social condition of neighbourhoods with a consequent diminution of rental and capital value are familiar to us all: it is merely necessary to add that the possibility of these vicissitudes should be fully present to the mind, and allowed for approximately in the price, and the position advocated is enforced that an average quality of risk in the aggregate of investments should be provided by investing also partly in municipal stocks, Colonial Government Securities and other approved forms. Before these purchases are effected a Valuation will naturally be requisite, and special attention directed to the permanent structural stability.

How To Treat Income From Investments

I should here insert a sound article of procedure which is applicable to the whole of the holdings of an investor, whether they consist of mortgages or Stock Exchange Securities, or the two combined, namely, that the total income derived from all investments and mortgages should not be treated as an income of profit to be expended or invested without reserve, but that a part of it, roughly proportioned to the character and extent of the entire investments, should be strictly regarded as of the nature of a sinking-fund - that is, of an annual sum, which, by accumulation, shall be held as a provision for restoring any losses upon the total principal which may occur from time to time. Since the most sagacious foresight cannot forecast the changes which may and must happen in securities of the choicest nature, the investor in this way adopts an enlightened and common-sense mode of viewing his holdings, and prudently prevents the surprise and inconvenience which reductions of value, foolishly considered to be alien from his capacity of choice, generally occasion. I am glad to notice that an able writer on Finance, Dr. Robert Giffen, has in one of his volumes suggested a similar course.

Freehold Ground Rents

A reference to the purchase of ground-rents - as a capital form of investment in many instances, where the properties are freehold - may close this chapter. A is the owner of a plot of land: he lets it to B for a term of ninety-nine years at a rent of £50 a year, on condition that, within a brief specified time, B shall erect houses upon it possessing an aggregate rental value of £350, with certain covenants in favour of A, respecting, for example, the maintenance of the premises in sound repair. The lease would further contain restrictions upon the use of the houses for dwelling purposes exclusively, and would be rescinded - and all the expended capital of B forfeited in A's favour - should the covenants fail to be performed. On the expiry of the ninety-nine years the whole of the houses would become the absolute property of A, and B must meantime obtain the remuneration upon his outlay and the restoration of his principal by means of a sinking-fund out of the net rental he receives of £300 a year. A is accordingly the owner of (1) a freehold ground-rent of £50 a year, for which he can distrain upon the property, and (2) the reversion to the £350 a year when the lease has terminated. A's interest can be sold, and the purchaser would then become entitled to the complete (or twofold) rights which A possessed. If such a purchase be effected the value of the reversion to the full £350 a year gradually increases in value as the lease proceeds to its close; and since B and his assignees are bound, at the end of that time, to restore the premises to A (or his assigns) in reasonable repair, the purchaser from A of the ground-rent must be especially vigilant (while exercising a general supervision over the state of the buildings throughout) to see that during the final ten or fifteen years the covenants for repair are fully observed.

In such an investment the suggestions formerly submitted in connection with house property obviously apply; the proper distribution of such purchases in order to prevent the whole becoming adversely affected by a change in the attractiveness of the locality for residence, by the substitution of an inferior class of tenants, with the consequent reduction of the ultimate income of £350 a year expected and paid for; and particularly, prior to the investment, should the solidity of structure of the buildings be certified by a practical builder. I call to mind a large number of houses built on such a lease from the ground landlord, and forming a terrace; immediately the last house at the end of the terrace was erected to the roof, three-fourths of the building summarily fell down; and it appeared to me evident that in consequence of inferior materials or workmanship, or both, the remainder of the houses were only maintained erect through each being buttressed on both sides by the adjacent buildings. The purchaser of the ground-rent and reversion, in this case, would enter into a forlorn prospect when the reversion arrived. And the present egregious and disastrous apotheosis of the so-called working man - cultivated as a mere source of voting power by all political parties - is in most striking contrast with - admitting admirable exceptions here and there - his absence of skill, carefulness and conscientiousness in the performance generally of his manual work. Investments of this nature yield an excellent remunerative return, but, for the reasons specified, demand especially thought and capacity of judicious selection when the element of perpetuity must form the principal consideration in decision.