Leasehold Ground Rents

The reference to the purchase of a leasehold ground-rent need be brief, since investors are counselled to avoid this class of security. In the preceding illustration, B may build the houses, worth in total £350 a year, upon a portion only of the leased land, and charge the entire ground-rent of £50 upon this section: he may then lease the remainder of the land to C for ninety years at a rent of £35, accompanied by the obligation that C shall erect buildings thereon worth a rack rental of £200 a year. B is then said to possess a leasehold ground-rent of £35 issuing out of the land let to C, for which he can distrain upon the whole of the property, which is worth £200 a year: and the same position, of course, is occupied by any purchaser from B. But the grave difficulty lies in the fact, that if C, or any of his assigns, violate the covenants contained in the original lease from A to B, that lease and the sub-lease to C (which depends upon the former) become forfeited, and A, or his heirs or assignees, can absolutely claim the wholc of the properties upon the entire land without compensation.

Without entering into any further explanation of the possible troubles attached to the purchase of a leasehold ground-rent, the investor will perceive that such a purchase lies outside his prudent regard.

Many other varieties of investment in different forms might be cited, but the survey would become tedious, especially as the general and specific rules advocated in this book are universally applicable, or can readily be adapted to each description. The necessity expressed throughout of individual care and judgment upon the materials collected in each instance for decision is confirmed by the consideration which we have devoted to every principal form of investment.

The limitations of human foresight, as I have stated, must necessarily involve risks in ventures, however skilfully and presciently they have first been studied. The following illustration shows how the most unanticipated factor in the depression of values may intrude. One would have imagined that mortgages and purchases of properties in attractive residential quarters of the West End of London (particularly those possessed of airy and spacious streets) would be permanently stable. And yet the introduction of motor cars and motor carriages, with the vibrations they create, their noise and smell, have, in many instances, produced a most seriously adverse effect upon the value of these securities and investments.

Every investor should prepare, and write-up as investments are made, the following simple books -

1. A register of his securities; specifying in respect of each -

(1) The number (1, 2, 3, 4) of the investment (or mortgage).

(2) The name of the government, corporation, company, and so on, whose obligations, stocks or shares, have been bought; and in mortgages the name and address of the borrower.

(3) The precise nature of the investment (or security), debenture, preference stock, etc. (and, in mortgages, the situation and description of the property).

(4) The amount invested (or advanced).

(5) The price paid for the investment.

(6) The rate of interest and its periodical dates of payment (in the case of mortgages or leaseholds the recurrent instalments of principal and their dates should be noted).

(7) The date of redemption (or repayment of the mortgage debt).

(8) The dates of the payment of fire premiums (or ground-rent) and the amounts.

(9) The company or firm from whom the interest warrants will be received, and by whom the invested principal will be discharged.

2. An interest diary; to be divided into sets of two months each: thus, as a specimen, for the case of interest payable in January and July (and similarly for February and August, and so on) -

As the interest is received on each occasion a cross might be inserted in the relevant column.

Interest being paid half-yearly, the two months appear on the one page; if interest bo receivable quarterly, say in January and April, July and October, the entry of the cross will appear in the January-July column on the one page, and in the April-October column in another.

The register (which should be furnished with an index of the names of the governments, corporations, etc., in which each investment is made) should be consulted when a fresh investment is presented for consideration, so that the proper distribution of risks may be observed.

The Register should be examined half-yearly in order that the prices paid may be compared with current values, so that (without becoming that gainer of ultimate loss, the professional speculator) any very exceptional opportunity (which may rarely occur) of sale and securing a special profit may be realised. But here - so important is the caution - remember that the general practice should be to purchase for permanent retention, and that the decrying of sound securities, the special praises of securities generally, the artificial inflation of prices, and the depressing effects of commercial crises, and "market" manoeuvres, are essentially transient, and do not affect the intrinsic worth of genuine investments.

In a following chapter I shall briefly describe the mode of operation in what is termed the Money Market, and the manner in which the vicissitudes in value of securities occur; so that by an exhibition of the producing causes and their nature, I hope to afford ground for sobriety and calmness of judgment and decision on the part of the investor, if he have observed the preceding rules with intelligence and thoughtfulness, in the selection and retention of the investments in which his savings have been deposited.