Pre-rented property, as the name suggests, is a property which is sold with a rental agreement still in place. To simplify, a pre-rented property is referred to as a property which is rented to any organisation 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.
- 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 maximise 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 minimise 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 for 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 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
- 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.
- 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 in the property till it is vacated.
- Credit worthiness 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 absence of finding the required business.
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.