Preleased or pre-rented property is a property that is leased out to a party, and then sold to a buyer with the tenant. I.e. along with the transfer of the ownership of the property, the lease agreement is also transferred to the new owner. The new owner will start receiving the rent towards the property from the subsequent payment cycle, without having to worry about finding a tenant.
For example, consider Mr. Sharma who owns a shop on the ground floor in Mumbai. He has leased it out to a retail chain for Rs. 10 lakhs a month. He sells this preleased property to Mr. Lekhi for Rs. 10 Crore. Now, the lease is also transferred to Mr. Lekhi and the retail chain would pay the rent of Rs. 10 lakhs a month to Mr. Lekhi.
Advantages of Buying a preleased property
1. Regular income with appreciations: Generally, real estate investments are done with long horizons. The capital appreciation takes years, and therefore return on the investment is delayed. An advantage of preleased property is that some form of ROI starts immediately, and as rent appreciation happens on an annual basis – the return grows from year to year.
2. Capital Building: As noted earlier, rent yield from a preleased property starts on purchase itself. This can be used to fund the purchase of the property in part. For example, if the purchase was funded through a loan from the bank, it is typical for the rent from the preleased property to be used to pay up the EMIs of the loan.
3. Liquidity: Real estate is a non-movable, highly illiquid investment. But a preleased property provides some amount of liquidity in form of regular rent yields. Further, it has been observed that a rent -bearing property is easier to sell in the market compared to an unleased property.
4. Maintenance: With a preleased property, the burden of maintenance of the property falls on the tenant. This frees up the investor from a major worry that comes with the purchase of real estate properties.
5. Property Taxes: The burden of tax and society dues may feel unjustified on a unused property. With the property yielding rent, some of it can be used to pay up these expenses.
This is not to say that one must always choose to invest in preleased properties only. This kind of a property comes with its own set of limitations as well. These include:
1. Big ticket investment: Preleased properties are generally costlier than unoccupied properties. Minimum ticket size for such a property is considered to be Rs. 3 crore. This makes the option attractive only for those investors who have a sufficiently large corpus available.
2. Poor inflation adjustment: Another concern stems from the fact that the rent yield, despite an appreciating rent, generally decreases with time. This is because the capital appreciation from the value of the property is typically much higher than the appreciation in the rent. This means smaller and smaller percentage of the property value is recovered each year. Though this may not be the case when the real estate market is depressed, this does become very pronounced when the market is booming.
Heritage Home Associates can help you find the right preleased property in Mumbai based on your investment requirements. We ensure that you get not just a prime property but that the tenant being transferred is honorable.