There is no doubt that real estate holds the greatest attraction for all investors, particularly commercial real estate. Investment in commercial property guarantees high returns, and better capital appreciations. One form of commercial property investment is investment in pre-leased commercial property.
What is a Pre-Leased Commercial Property?
A pre-leased/pre-rented commercial property is a property which has already been rented out to a company/bank/retail brand, and is on sale now. As the name indicates, it is already leased to a tenant at the time of sale, and is deriving a fixed income.
Such properties are sold at their rental yields. Rental Yield is essentially the regular return gained on investment, without considering the expected capital gain or loss from sale. The percentage return (rental yield) varies generally between 4.5% and 8%.
Bank-occupied properties have returns ranging between 4.5 and 5.5%, retail properties have returns between 5 and 6.5%, and corporate spaces fetch a return between 6.5 and 8%.
The investment amount can start somewhere at Rs 50 Lacs and go up to Rs 100 Crore or higher.
What are the advantages of Pre-Leased Commercial Properties?
Pre-leased Commercial Properties offer a multitude of advantages. They are as follows-
Assured returns right from Day 1: 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 pre-leased commercial 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 deed. Rent appreciation is usually 15% after every 3 years, in a 9 year lease.
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. The lock in period usually is 3 years for a lease of 9 years.
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: One, the property is already occupied for a specified duration, which means that returns are guaranteed atleast for the next few years and the required legal documentation has already been done. It is a safe long term investment. Two, 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 90% of the cost of property. For this purpose, they use the 'Future Rental Discount' tool, which serves in facilitating a seamless property buying process.
To conclude, Pre-leased Commercial Properties offer a very viable investment option, with low risk, high returns, and good capital appreciation.
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