Is Investing in Pre-Leased Property Worth It?

Rental income is a priority for real estate investors nowadays. However, investing in real estate doesn’t give them returns from the first day. The property gets appreciated over a long time, and then they sell it and book returns.

But during this period, from investing to selling, that empty patch doesn't provide them with anything, and to fill in this empty patch, they rent out their property so they earn rental income from that property until they sell it. Now the question arises, when they put pre leased property for sale.

Now the question is, should you purchase such pre leased property? Because these properties come with a higher initial investment but provide rental from the very first day. Let’s understand the pros and cons of pre leased or pre rental property. 

Why invest in pre leased property?

       •  Steady monthly rental income
       •  Higher potential for value appreciation
       •  Reasonable investment breakeven period
       •  Quality tenants ensure stable income
       •  Prime locations attract constant demand
       •  Immediate income from day one
       •  Higher liquidity from the start

Cons of Pre Leased Property

       •  Higher initial investment cost
       •  Risk of tenant lease nonrenewal
       •  Maintenance and renovation expenses

Should you Invest In Residential or Commercial Pre Leased Property for sale?

The average rental in pre leased commercial property is around 8 to 12 per cent, whereas in pre leased residential property, it's only 2 to 6 per cent. Commercial properties have long term leases that ensure a steady income for long term investors. However, residential pre leased properties have short term leases and low rental compared to commercial pre leased properties. 

It is hard to rent out commercial properties as they need high value investment, but it is comparatively more straightforward for residential properties.  So it's up to you; if you want high rental for a long time, go for commercial pre leased property, but if you want to rent out your property quickly and have a low budget to invest. Go for the residential pre leased property.

Key Points to Consider for Pre Leased Properties

Entry Price Matters

When investing in pre leased properties, entering at a lower price means better returns. The less you pay initially, the higher your overall profit will be in the long run.

Quality of Tenants

The type of tenant you lease to affects your returns. Banks, insurance companies, and government organisations (PSUs) usually give stable rental yields of 68% and tend to stay longer. 

On the other hand, IT firms, BPOs, and MNCs can offer higher rental yields, but they might not stay for as long. If a tenant spends a significant amount, say Rs. 3 Cr. for interior fittings, they are likely to stay for a longer period.

Understanding Rental Yields

Rental yields are calculated based on the total cost of the property, which includes the base price, car parking fees, and stamp duty, but excludes the security deposit. To find the yield, you divide the annual rent by the total property cost.

Example of Cost Calculation

Property Cost

Imagine you buy a pre leased commercial space for Rs. 7 crore with 12,000 sq ft of leasable space. This means the price is Rs. 5,833 per sq ft. After adding costs like parking and stamp duty, your total expense might go up to Rs. 7.5 crore. If the tenant provides a security deposit, your net cost could be around Rs. 5.5 crore.

Rental Income

Let’s assume the tenant pays Rs. 150 per sq ft as monthly rent, but property tax is Rs. 40 per sq ft. So, your net rent is Rs. 110 per sq ft. That means you earn Rs. 13.2 lakh each month or Rs. 1.58 crore annually. After subtracting maintenance, repairs, and other costs, your net income might be around Rs. 1 crore per year.

Calculating Rental Yield

Your gross rental yield is the annual rent divided by the property cost, multiplied by 100. Using this example, the gross yield would be around 21%. The net yield, which is the actual income after expenses divided by the total cost, would be about 13%. This is still a strong return.

Lease Terms and Rent Hikes

Standard Lease Periods

Typically, pre-leased properties come with a 3-year lease agreement, with a common clause allowing a 15% rent increase when renewing the lease. This ensures your income grows over time.

Break Even Point

Profit Timeline

If your net investment is Rs. 5.5 crore and you make Rs. 1 crore annually, you’ll recover your initial investment in about 5.5 years. After this period, any income you receive will be pure profit, making it a great long term investment.

Investing in pre leased properties can be a smart choice if you focus on getting a good price, choosing reliable tenants, and understanding the costs involved.

Is pre leased property a good investment?

Pre leased property is worth the investment, if you are looking for a rental from the very first day, but you need to invest a high amount initially. You can go for residential pre leased property if you want to invest a low amount initially. Both are good investments as per your convenience.