People who want to have a consistent source of income frequently choose to invest in real estate. Pre-leased property is one kind of real estate investment that has grown in popularity lately. This is a type of investment that can give you rental income right away, without the burden of looking for a person who wants to stay at rent. We will define pre-leased property in this blog article and discuss if it is a good investment choice for you.
What Is the Meaning of Pre-leased Property?
The pre-leased property meaning is as follows: A property is referred to as being "pre-leased" if it has previously been leased to a tenant before being sold to a buyer. The building might be either residential or commercial. In other words, the renter stays put after the property is sold, making the new owner the landlord. The prior owner transfers to the new owner the lease that was signed by the renter and the former owner. The previous tenant is still using the property and rent to the new owner . There are several benefits to investing in pre-leased property, which you can read about here.
What Is the Difference Between a Lease and a Pre-lease?
A lease and a pre-leased property are two different concepts in the real estate industry. A lease is an agreement between the owner of the property and the tenant, which allows the tenant to use the property for a specific period in exchange for rent payments. On the other hand, a pre-leased property is a property that is already leased out to a tenant, and the owner of the property intends to sell it to a buyer as an investment.
The key difference between a lease and a pre-leased property is that in a lease, the tenant and the landlord enter into a new agreement, whereas in a pre-leased property, the buyer takes over the existing lease agreement along with the property.
When a property is pre-leased, it means that the buyer does not have to look for tenants as the property is already generating rental income. The buyer will receive the rent from the day of possession of the property. Moreover, the buyer can also assess the rental income potential of the property based on the existing lease agreement, which makes it easier to evaluate the investment potential of the property.
Types of Pre-leased Properties
Pre-leased properties can be either residential or commercial. Types of Pre-leased Properties include:
- Residential apartments
- Independent houses
- Office spaces
- Retail stores
- Industrial Places
- Healthcare Places
- Warehouses
Pre-leased Commercial Property
For seeking a consistent stream of rental income, Pre-leased Commercial Properties are a desirable investment choice. They are popular investments because of the numerous advantages that they provide. For example, if a commercial or economical property is already leased to a particular tenant, an investor or a real-estate owner can purchase it and begin receiving rental revenue right at the same time. Pre-leased commercial properties are known to offer a stable source of income and have the potential to increase in value over time.
People can get reliable income by using pre-leased properties. For example, if you invest in a property building that has already been leased, you can evaluate the valuation terms by receiving a rental income of between 6% and 8% per year. Given that the property is already leased to a tenant, this rental Property Income revenue is now guaranteed to give returns to you.
In addition, the tenant's lease arrangement with the previous owner is transferred to the new owner. As a consequence, there is no chance that the tenant will leave this particular property.
Rental Property Income From Commercial Property Vs Residential Property
The table given below highlights the rental income from commercial property vs. residential property:
| Category | Commercial Property | Residential Property |
|---|---|---|
| Usage | Business operations or capitalistic income generation (via capital gains or rental income) | Apartments and standalone homes for primary residence |
| Lease Period | Long time period (3-9 years) | Shorter time period (6-9 months) |
| Lease/Rent Contract Tenure | In-depth and complex contract for long tenure | Simpler contract for short tenures |
| Rental Yield | Range from 8-11% of the capital invested | Range from 1.5-3.5% of the capital invested |
| Stability of Income | Generates regular rental income for a long time period | Rental income is less stable as tenants shift frequently |
| Lease Process | Tenant and owner both are equally involved | Legislation supports tenants, making it tough to evict them |
How Do You Calculate ROI on the Pre-leased Property?
The profitability of the investment needs to be determined on a first-come basis in order to calculate the ROI (Return on Investment) on a pre-leased property. The most frequently used method for calculating ROI is the rental yield process. This can be calculated by measuring the ratio of the annual rental income to the total investment made on the property, expressed in the form of a percentage.
The formula for calculating ROI is:
ROI = (Annual Rental Income / Total Investment) x 100
However, the buyer should ensure that the rental income is accurate and reflects the market rent for similar properties in the area. Additionally, investors should consider other factors, such as the duration of the lease agreement and any additional expenses, while calculating the ROI on a pre-leased property.
What Are the Disadvantages of Pre-leased Property?
Some of the disadvantages of the pre-leased properties are listed here:
Investing in pre-leased properties is that the rental source of income is fixed and may not increase over the years.
The rental income from pre-leased properties may be sometimes lower than the market-standardized rental values, as the lease terms may have been negotiated before the property value increased.
There is also a risk that the tenant may not renew the premade lease agreement, which could lead to a high duration of vacancy period and a loss of rental income.
The pre-leased properties can be more expensive than vacant properties, as the rental income is already established.
Is It Safe To Invest In Pre-Leased Property?
Pre-leased homes may be a secure and alluring investment choice for people looking for a consistent rental income with little fuss. However, before making an investment in a pre-leased property, careful due diligence must be done, and a number of factors taken into account.
Experts say that before making an investment in a pre-leased property, investors should take into account the lease's term, any rent increases, and maintenance obligations. Finally, to ensure a smooth transaction and prevent any legal or financial issues, investors should collaborate with respectable real estate agents and other people like that.
If you are interested in investing in pre-leased property in India, you can check out our offerings here.
Conclusion
From this blog, it can be summarised that pre-leased properties might be a profitable investment choice for people looking for a reliable rental income stream with less risk. Before making a investment choice, investors must take into account a number of variables, including location, tenant characteristics, lease duration, and potential rental yields. In order to prevent unexpected expenses, it is also crucial to make sure that all legal and financial facets of the pre-leased property commercial property are carefully explored.
Pre-leased homes can be a safe investment choice for people looking for long-term rental income with careful analysis and a solid grasp of the market. Investors can use online tools from prop returns to learn market trends and ROI calculations or speak with real estate consultants to make educated investment selections.
