Pre-Rented Property : A Complete Guide

Pre-rented property, as the name suggests, is a property that is sold with a rental agreement still in place. To simplify, a pre-rented property is referred to as a property that is rented to any organization or enterprise and is then sold to the buyer with that rent as an income. The transfer of lease takes place immediately after the transfer of the property to the new owner. Additionally, the buyer of the pre-rented property will now enjoy the rental income. Pre-rented properties are usually a better fit for investors as it offers a higher premium where the Return On Investment is assured.

We could use an example to simplify the aforementioned term. Mr. X owns a 5000 square ft shop in New Delhi in the main market. He/She has leased the shop to some startup at a rent of Rs 10,000. He sells the shop to Mr. Y for Rs 1,00,00,000. According to the new arrangement, the startup will now pay the rent to the new owner of the property, Mr. Y.

WHY INVEST IN A PRE-RENTED PROPERTY?

Investing in a pre-rented property has its own set of benefits. The most important one is convenience and less friction in the accomplishment of the goals of the investor. Further there are many benefits some of which are mentioned below:

• Assured returns:  When an investor invests in a pre-rented property, he is entitled to the rental income and the tenants from the previous owner. Therefore, the investor must not be in a hurry to find the tenant for his property. The investor receives an assured rental return from day 1 on his investment with absolutely no waiting period.
• No hassle in finding the tenant: One of the major pros of a pre-rented property is that it sets you free from finding a tenant for your property. The owner of a pre-rented property does not have to get involved in the long and tedious process of finding the right tenant saving him advertising costs and time too. Further, since the rental contract is already established, it saves the new owner the legal hassles as well.
• The benefit of Capital Appreciation: Apart from assured rental returns, the investor usually makes an investment in real estate with an outlook of capital appreciation over a period of time. This seems like a profitable deal for the investor if he wants to maximize his Returns on Investment (ROI). Pre-rented properties have proven that they have the potential to get rented. This helps in raising the value of the property as it increases the opportunity cost of selling. In the long run, it yields a premium price.
• Source of Regular Income: A pre-rented property being an appreciating asset can be a great investment opportunity for buyers. Since pre-rented properties are dependent on timely rent, they are often well-received for a regular source of income. This is very lucrative for investors who need a ready-made package offering a monthly income without any hassle.
• Medium to Low Risk: Investing in a pre-rented property is often regarded as a safe investment. Returns will be assured for the buyers since the property will be rented for a particular period of time. Also, the probability of tenants vacating the pre-rented property before the expiry of the specified duration is fairly low. Further, the rental agreement is pre-decided which gives the investor a foresight to plan for the future course of action and minimize his risk.
• Shorter processing time: Since the previous tenant has performed his due diligence with respect to the tenant, all the troublesome and hassle job is already done for the buyer. With all the required relevant information being available, the investor is assured of the credibility and capability of the tenant to pay timely rent. Generally, it takes time to develop this kind of credibility, while the pre-rented property offers this in a package with the property itself.
• Offer Easy Liquidity: One of the major drawbacks of holding real estate investments is their illiquidity. Since pre-rented properties yield regular rent, they are easier to sell in the marketplace. This is because of their being rented which is an added advantage over other properties. Pre-rented properties are sold more easily than other properties of a similar kind.

All these focal points drive the investors to purchase pre-rented properties. However, one should not turn a blind eye towards the shortcomings these bring. Some of them have been discussed below.

SHORTCOMINGS OF PRE-RENTED PROPERTIES

1. Huge Investments: Good pre-rented properties with prominent locations and infrastructure facilities require high investment. This becomes a major drawback restricting the investments by High Net worth Individuals or HNI’s. Small or medium investors find it difficult to invest in such properties.
2. Lease term: The investor must perform his duty of carefully checking the lease term. If the lease expires and the tenant vacates the pre-rented property, it is often time-consuming and troublesome to find new tenants. Therefore, he will have to incur a loss of rental income accompanied by diminishing returns. Further, there is a lack of control over the property since it is already rented and a longer lease period might bind the investor to the property. He/She might not be able to make any modifications to the property until it is vacated.
3. The creditworthiness of Tenant: It is a must for the investor to check the creditworthiness and the profile of the tenant. The tenant should have a stable and long term business. Many government companies, banks and FMCG’s are known to have a better holding capacity than some companies who might vacate in the absence of finding the required business.

CONCLUSION

The purchase decision for a pre-rented property depends solely on the buyer’s expectation. If the buyer wants more control, it is not a suitable option but on the other hand, if the buyer himself wants to rent it, then it is a very convenient option as it saves the buyer hassle of finding the tenant. Assured stable returns and capital appreciation make this arrangement widely popular for the commercial real estate market. In the current scenario with renting space witnessing a high growth keeping in trend with the whole real estate market, pre-rented properties offer high utility.

Source: https://www.spacecreattors.com/blog/investment-in-pre-rented-property.php

Benefits Of Investing in Pre-rented Property

The real estate sector is one of the largest industries that is globally recognized. The way we look at it is that a lot of parts or segments in Real Estate have been doing well. Over the last few years, there’s an upward trend in the Indian Real Estate Sector. Pre-Rented Property (PRP) is increasingly becoming one of the attractive investment opportunities as it generates income from day one. A lot of Investors have been very actively investing in this asset. Especially in an era post the demonetization drive, where the returns on fixed income products like bonds, bank deposits are witnessing a decline, PRP is becoming an attractive investment opportunity as it provides stabilized returns with an appreciation on exit

Let’s first understand what Pre-Rented Property (PRP) is

Pre-Rented Property means Property sold with Tenant i.e., Property leased to a grade Tenant at an agreed rent (typically in the range of 3-15 years) with a fixed security Deposit of 3 to 6 months and after that sold in the market. The lease is then transferred to the respective owner with the transfer of property, and the new owner enjoys lease rent subsequently.
Now, these returns range between 6%-8% p.a. to begin with and gradually improves on account of rent escalations, which is typically 5% on a year or 15% after three years, depending on the lease terms.

Importance of Pre-Rented Properties:

There are multiple benefits for purchasing a pre-leased property, to begin with, PRP is already given on lease and fetches a regular rental income, as the investor gets the lease transferred, he/she also receives the tenants and rental income by default. There is no waiting period for the buyer to earn Return on Investment (ROI), and later this income can be used for various business purposes.
Usually, the value of pre-rented properties appreciates over some time. And, if it is located in a premium location or with good infrastructure, design, and amenities, then the capital appreciation can go even higher.
The buyer can enjoy a good capital appreciation on pre-rented properties, provided they keep a gap of at least 10-15 years. Hence the investors can make around 16-18% p.a. returns from such an investment opportunity.
Most real estate properties are low on liquidity, as it can take months to years to sell them. However, PRP comes with the benefit of regular rental income, which makes them a more liquid investment in nature. Due to this advantage, individuals and corporate investors prefer to buy commercial pre-leased properties over unrented assets.
The other lucrative benefit for PRP is that investors can avail of a term loan against rental discounting for grade A Tenants.



Few factors that should be taken as a consideration while Buying Pre-Rented Properties are:

Duration of lease: Longer the period better it is for the property in terms of stability.
Return on Investment: Higher ROI is better, but one should see that it should be close to the ROI of similar properties in that area

Lock-in period: Higher the lock-in period better it is, locking of 3 to 5 years is standard. Substantial penalty on the Tenant on vacating the property within the lock-in period gives higher safety.

Loan on Property: The seller should clear all mortgages of bank and personal loans; undertaking from the buyer regarding the same is a must.

Furnishing of Property by owner or Tenant: Buyer should check about the furnishing/interiors of the property. If the owner has done the furnishing of the property then it is better, if Tenant has done the furnishing of the property, then it is essential to know about the disposal of interiors and furniture in that case.
         
Dues on the Property: All the dues on the property should be clear i.e.
Maintenance, Electricity, MCD taxes, House tax.

Source: https://www.spacecreattors.com/pre-rented-projects.php

Pre Rented Property in Gurgaon

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Highlights

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Pre- Rented Property and it’s Benefits

The best Pre-Leased commercial property is the property which is accessible and on rent to an MNC, Bank, Branded Retail or Car Showrooms.

There are a plethora of benefits of investing in a pre-rented commercial property.

1. No risk involved like the pre-launch or under construction options, with executing registration and transfer of property.
2. Long term and immediate regular monthly returns.
3. High-quality tenants like Banks and Multi-National Corporations, Financial institutes, Branded Retails, etc.
4. Property appreciation with higher profitability.

While investing in a Pre- Rented Property, Investors must go through some guidelines or pointers which could help them grow their money faster and with higher returns.

1. Tenant: Tenant is the most important factor to determine the real rental income from a property. MNCs are the favourites amongst investors as Multinational Corporations not only pay rentals on time, but they also increase the capitalized value of the property.
2. Location of the Building: It is the deciding factor about the capital growth of the property as to how much it is going to get appreciated in the future. Good location produces a lower vacancy rate, higher capital appreciation, and long-term tenancies.
3. Exit Route: If an investor wants to sell the property in the future they must engage with a hassle-free process.
4. Lease Terms & Lock-in Period: Lease terms can be anything between 5-15 years. However, long-term leases are always a safer bet. The security deposit given to the landlord by the tenant exhibits the confidence and the steady cash flow of the tenant. Security deposit usually ranges from three to six months of rental value. Lock-in indicates the tenant’s strong business forecasts and commitment of a lease. The deal becomes more justified with a high lock-in period. A good deal is considered to be the one that has a long lease term with a minimum of 30 per cent –40 per cent time.

Frequently Asked Question?

What is Pre-Rented Property?

A property which is accessible and on rent to an MNC, Bank, Branded Retail or Car Showrooms is a Pre-Rented Property.

What are the advantages of investing in Pre- Rented Property?

No risk involved like the pre-launch or under construction options, Long term and immediate regular monthly returns, High-quality tenants like Banks and Multi-National Corporations, Financial institutes, Branded Retails, etc., Property appreciation with higher profitability.

What are the things to keep in mind while buying a Commercial Pre-Leased Property?

Tenant, Location of the Building, Exit Route (in terms to sell the property without any hassles) and Lease Terms & Lock-in Period

What is the Best Tenant for a Pre-Leased Property?

MNCs are the favourites amongst investors as Multinational Corporations not only pay rentals on time, but they also increase the capitalized value of the property.

Source: https://www.spacecreattors.com/blog/pre-rented-properties-and-its-benefits.html