Preleased Properties
In this post ,we will try and analyze the Advantages and Disadvantages of Preleased properties.
As the name suggests, preleased properties are those properties which are already leased out and earning a rental income ,from the day you purchase them.
Advantages:
1. It could be a good opportunity for investors, looking to generate passive income from real estate investments.
2. There is absolutely no waiting period, your investment starts earning rent from day one.
3. There is no stress of marketing your property to get a tenant , as this aspect is taken care of.
4. There is no speculation of who ,the prospective tenant maybe, as you are already aware of the current tenant, before you buy the property.
5. Since the leave and license agreement is already executed and in force , it saves the investors the time , money and efforts to negotiate multiple terms with the tenants.
6. Because it is a rent yielding property the incoming rent can be securitised and a loan taken against the receivables to offset other financial commitments.
7. There is also a comfort of not having to handle the society, or other agencies involved in such cases , which at times requires monumental patience and follow up.
Disadvantages:
1. In most cases , preleased properties are sold at a premium as it is a earning asset from day one.
2. The current lease rent , maybe much higher than the prevalent rentals in that building or area , this is primarily due to strong marketing skills , personal contacts or simply manipulated by unfair means.
3. The investor has to accept the current leave and license agreement as it is, there is no option or flexibility to alter any clause.
4. Uncooperative attitude or irregular payment of rent is also one of the reasons why such properties are traded.
Pro Tip: Please meet the existing tenants to know, if there are any disputes etc with the current owners, also request the owners for a ledger account of the bank statement showing only the dates on which the rent has been deposited. Check with the society if there is any nuisance created or any misconduct by the tenants.
5. More often than not, once such properties are vacated, it’s extremely difficult to get a fresh tenant at the existing lease rentals.
6. As these properties are in most cases, sold at a premium, the possibility of capital appreciation is always questionable.
7. Lock in clause, which means neither the lessor nor the lessee, can terminate the contract without paying the pre decided penalties. This is a clause, which attracts most investors other than the Return on Investment.
Pro Tip: Simple as it may look, it is a extremely challenging task to enforce the same, if the tenant decides to do so.
It may require filing a case in the court for specific performance etc.
A sincere advise based on having concluded numerous such transactions is, please do your homework and due diligence keeping the following points in mind.
1. Regular title search of the property.
2. Status of Occupation Certificate.
3. Status of the society with financial health.
4. Age of the building.
5. Visit the building and check the other occupants.
6. Check the total details of the tenant, including financial health , age of the company, any criminal cases pending etc.
7. Get the leave and license agreement thoroughly checked to match what has been conveyed verbally.
8. Meet the tenants to ensure there are no pending disputes etc with the current owners.
9. Check the leave and license rates & the sale prices of properties in the building and the vicinity.
10. Check if there are units lying vacant in the building, if yes for how long .
Each investor has to decide what suits their perspective. Do your homework and invest wisely.
See you next week. Until then, Please feel free to share your feedback and opinions in the comments below.
