Points to consider while buying Pre-leased Property
A pre-leased or pre-rented property is one that is leased out to a party and then, sold to a buyer along with the tenant. there is also a simultaneous transfer of the ownership of the property; meaning the lease agreement is also transferred to the new owner. A pre-leased property always comes with many benefits, like higher capital appreciation, regular income, and zero waiting period. Pre-leased properties are always a win-win situation for both parties as sellers receive a good valuation of the property and turnaround time is less and buyers get rent from the very first day of their investment.
More deliberation is required for the evaluation of pre-leased properties, mostly, because one buys a property at higher rates in comparison to a vacant property. Taking professional advice is always the best option before choosing a pre-leased property.
Before finalizing pre-leased properties, there are a few factors that need to be considered like lease duration, tenant details, rental yield, and property valuation. If you consider all points carefully, pre-leased properties can turn into rewarding investments in the future.
If you are planning to buy a pre-leased property then there are certain unique factors that you need to consider.
Points to remember while buying Pre-leased Property
Duration of lease Longer the duration better it is for the property in terms of stability. Most of the agreements are for 9 years.
Rent Escalation Standard rent escalation is a 15% increment every 3 years or a 5% increment every year.
Tenure of the lease expired One should avoid properties where rent tenure is about to be over. If the tenure of the agreement is about to be finished in 2-3 years then one has a risk that the tenant may not renew the lease.
Return on Investment: Higher ROI is better, but one should see that it should be close to the ROI of similar properties in that area, else this may be a trap by a seller to sell the property at higher rates and after the sale of the property there is a possibility that the tenant may vacate it.
Rental yield In both, commercial as well as residential properties, rental yield indicates the return on investment. While rental yield is calculated by the annual rental received divided by the property price, an investment property should generate income and increase in value, or better, do both. Currently, the warehouse rental yield is very high.
Lock-in period: Higher the lock-in period better it is, locking of 3 to 5 years is standard. Heavy penalty on the tenant on vacating the property in the lock-in period gives higher safety.
Exit clause for the tenant: The exit clause is applicable mutually for both the owner and the tenant, an owner should get enough time to find a new tenant in the exit clause time frame. A warning period of 3 months or more is good enough for the tenant to exit.
Any illegal or unauthorized construction on the property: One should check that any illegal construction on the property is not done, check the approved map by authority.
Dues on the property: All dues on the property should be paid, dues are generally in terms of electricity bills, RWA bills, charges of local authority like UD taxes, etc.
Furnishing of property by owner or tenant: The buyer should check about the furnishing/interiors of the property. If an owner has got the furnishing of the property, then it is better, if a tenant has done the furnishing of the property, then it is important to know about the disposal of interiors and furniture in that case.
Maintenance charges, power charges, etc: One should know of all recurring expenditures on the property, Lower monthly expenditures and maintenance charges are better. It is imperative to calculate one’s net rent in hand after paying all maintenance costs and property taxes. Then, calculate one’s net return on investment.
Tenant profile the best way to choose a tenant is always through professional advice. Before finalizing a deal, investors should evaluate the tenant’s financial background and quality. This helps to ensure that rentals are paid on time.
Building occupancy Rate Higher building occupancy means higher asset stability and higher feasibility of getting another tenant if the tenant vacates due to any reason. The property can get leased again as the building occupancy is high.
Security deposit A deposit paid by a tenant is usually a commitment toward the property. If a tenant vacates or if there are damages, the deposit amount insures the investor. A security deposit is given by the tenant to an investor when he buys the property. The higher the deposit, the better it is.
Factors related to property
Location of the property: Location is the most important factor that determines the value of any real estate asset. One should select the location of the property wisely.
Type of the property What kind of property suits you like commercial or industrial or residential? And in properties like retail, office, warehouses, studio apartment, etc.
Rental Prices in that Vicinity: Before buying a pre-leased property, one should check the rental rates of that area, the variation of the rent of the property should not be more than 10%. Above or below 10% is a concern to worry about.
Vacancy rate should be Low: There should not be many vacant shops/properties available in that area.
Future development: One should check the future development plans in that area, there may be some diversion, elevated road, or a toll point coming up in the near vicinity, which may result in heavy depreciation of the property. Such properties should be avoided.
Property grade: Grade A properties make a better investment option as they attract quality tenants and resale value is always maintained. Grade A properties are always in demand for buyers.
Property valuation: While one can understand the valuation of a property by studying data of the last transaction in the locality, talking to property consultants and property owners in the locality will help one to better understand the valuation of properties in a locality.
The commercial pre-leased property offers low to medium risk that includes fixed rental income and good yield, coupled with capital appreciation of the same over a period of time. That’s why it’s the first choice of the investor. But you need to consider the above-stated points before buying preleased commercial property.