What is Pre-Leased Property ? Benefits and Disadvantages of Pre-Rented Property.

Preleased or pre-rented property is a property that is leased out to a brand and then sold to a buyer with the tenant. Pre-leased properties already have tenants and ensure fixed income or assured returns. Along with the transfer of the ownership of the property, the lease agreement is also transferred to the new owner. The new owner starts receiving the rent after the transfer of the lease agreement.

Pre-rented properties come with several benefits like higher capital appreciation, regular income, and zero waiting periods. However, due diligence is a must before investing in these properties.

Nowadays lots of seasoned investors and new investors have shown their interest in preleased properties because pre-leased properties offer fixed income from high-quality tenants, and investors can exit the market with capital appreciation. Any investor calculates rental yield or ROI before investing in any property. There are commercial Preleased properties as well as residential pre-rented properties in the market. Investment depends on the appetite of the investor.

As commercial preleased properties generally fetch rental yield between 6-18% depending on the property to property. And pre-rented properties also give comfort ness as these investments are for a longer duration and in this long duration, they don’t require much attention which is a plus point for anyone who is looking for a side investment that does not require constant attention. Residential pre-leased properties usually offer anywhere around 2-7% rental yield.

Benefits of Pre-leased Properties

• Fixed monthly income / Passive income.
• Higher potential for property value appreciation.
• Investment with calculated break-even periods, with the potential for profitable exits down the line.
• Rental hike over the period of time as minimum lease duration is 9 years.
• Zero risks, i.e. you start earning from the beginning.
• Higher liquidity in the market for pre-leased properties.
• Loan against the rental income.

Disadvantages of Pre-leased Properties

• Considerably higher price and initial investment than regular properties.
• There could be issues where tenants do not renew their leases or break the lease in between.

Some Other Aspects Worth Considering

• The quality of the tenant is of utmost importance. Banks and PSUs usually ensure 6-8% in rental yields and they remain for longer durations. That’s why bank preleased properties are in high demand.
• The usual estimate is that if the tenant is paying a substantial amount for interior design, i.e. Rs. 2-4,000 per sq ft, then it is usually for a longer period.
• It is suggested that you should take a loan on pre-leased properties only up to 40-50% of the property value and not more than 70%.

Read – Points to Consider while Buying Commercial Real Estate?

Example of Pre-Leased Property

We are assuming that you are purchasing a pre-leased property worth Rs. 5 crores with a total leasable space of 8,000 sq ft. You are hence purchasing the property in a prime location at approx. price of Rs. 6,200/sq ft in this case. Now we have to add stamp duty charges, suppose it is 35 lac (7% stamp duty) finally total amount will be Rs. 5.35 crore (inclusive of stamp duty).

Now you are purchasing preleased property so there is some security deposit, which you will receive so assuming 55 lac is a security deposit so your net outflow will be Rs. 4.80 crore.

Now assuming the rental amount is Rs. 100/sq ft and the property tax amount is Rs. 18/sq ft. Hence, your net rental charges will be Rs. 88 per sq ft. This means that you will be earning Rs. 5.45 lakh per month or Rs. 65.5 lac per year. Now deduct expenditure on maintenance, facilities, repair and renovations, and so on. You may end up with a figure around Rs. 50 lakh in net rental income every year.

Hence, your gross rental yield is 13% (annual gross rental income/cost of the property * 100). Your net rental yield is 10% which is a handsome figure by all standards (using the same formula, i.e. net income/cost of the property *100).

How to calculate rental yield in Pre-leased properties

Rental yield is a return on investment in the form of rent in preleased properties which we are receiving, in the terms of percentage. Hence, your gross rental yield is

ANNUAL GROSS RENTAL INCOME/COST OF THE PROPERTY * 100

Gross Rental – Total rent received in a year – (tax+maintenance+facilities+repair+renovations) 

Conclusion

If you have the money to invest and the patience to wait for a longer horizon, then you can consider investing in pre-leased properties. However, make sure that you buy a property that has a quality tenant. You can take professional help before finalizing any preleased property.