Preleased Properties
Preleased Properties
This article will help answer the following questions regarding Preleased Properties
- What is a preleased property?
- How does it work?
- What is yield?
- Why should you invest in preleased properties ?
A preleased property is a property on sale, one which has already been leased to a tenant and is generating a monthly rent.
Investors invest in Preleased Real Estate with a view to earn a fixed income coming in the form of rent. Investors are transacting in commercial real estate (CRE) which is in demand as it offers high annual rental yield. While residential properties give 2-3% as rental yield, commercial properties offer a high rental yield in the range of 8% to 12% or even more.
The aim is to lease out to quality tenants, earn lease income over a 7-10 year period and subsequently exit with a moderate to high capital appreciation.
What decides the rental yield in these properties?
The entry price is one of the biggest factors in determining the yield. Lower the price, higher the yield. Another key factor is the quality of tenants. Commercial properties occupied by multinational companies (MNCs) like foreign banks, investment banks, etc, or domestic firms like BPOs, IT/ITeS units as tenants generate the highest rental yields.
Other aspects to take into consideration are lease tenure, lock-in period, rent escalation, security deposits, maintenance charges & property taxes.
How to calculate the rental yield
The calculation is simple. You are arriving at a price after including the total purchase price minus security deposit paid by the tenant. The annual lease rent is divided by the final price to arrive at a yield.
Generally, the lease term happens for a period of 5 years, with a lock-in period of 2 to 3 yrs. Escalation in the rent could be 5% yearly or 15% once in every 3 yrs which also leads to higher yield.
The key factors driving such investments are obvious as Preleased Commercial Real Estate’s demand is growing at a robust pace, vacancy levels going down and rising rentals. In a falling bank interest rate environment, where other financial products show signs of volatility, investment in Preleased Commercial Real Estate provides stable returns in the form of regular monthly returns and capital appreciation on exit.
Advantages of investing in Preleased Properties
- Assured returns right from day one: Usually, people buy properties and rent it out later. This means that the buyer looks for the tenant himself and has to wait for return, after purchase, till the time the property is actually rented out, whereas in the case of a preleased property, returns are assured right from day 1. This means there is a zero waiting period for Return on Investment (ROI).
- Fixed Monthly Returns: Since these properties are already occupied by tenants at the time of purchase, a lease agreement is already signed, security deposit collected, and lock-in period defined. Hence, a monthly return is fixed and assured. It is a very safe investment.
- Tax Saving: The rent received by the buyer is taxable. However, a 30% standard deduction is always allowed for repairs and maintenance, regardless of the actual amount spent. This means that you save tax on 30% of the amount and pay tax for 70% of the rent income received.
- Rent Escalation: Rent escalation is pre-defined in the lease agreement. Rent appreciation is usually 15% after every 3 years or 5% annually.
- Lock-in Period: A lock-in period is defined in the lease agreement. Lock-in period is the minimum time frame in which the tenant cannot vacate the property.
- High Capital Appreciation: Of course, the value of properties increases over time. But commercial properties witness higher capital appreciations. Not only do you benefit from the assured rents, but also from the value appreciation of your property.
- Low risk factor: The property is already occupied for a specified duration, which means that returns are guaranteed at-least for the next few years and the required legal documentation has already been done. It is a safe long term investment. Such properties are rarely affected by economic slowdown or recession in the realty market. This is because the duration of stay of the tenant and rent terms are already specified. Current market factors do not affect it.
- Easy Bank Loans: Financial institutions lend loans easily for pre-leased properties, even to the tune of 80 to 90% of the cost of property.
With investment in completed (ready possession) CRE, there are no risks associated with Land, Project Approvals and Constructions delays. Regulatory initiatives including GST, and RERA as well as demonetization have resulted in higher transparency that would further boost the commercial real estate space demand making it a compelling investment choice.
Complete list of preleased properties here