Considerations When Purchasing Pre Leased Real Estate

Location

The most important factor determining the value of any real estate asset is its location. Investors interested in pre-leased office space should consider investing in a city's central business district. Investors looking for pre-leased retail shops and banks should consider investing in areas with better public transportation accessibility (preferably on the main road), high footfall, and good frontage. If you plan to sell the property, a prime location will always command a higher price and result in a shorter turnaround time. The value of an asset will always be determined by its micro-market and the city in which investors choose to invest.

Lease Conditions

Make sure the lease is for an extended period of time, as finding new tenants is a difficult and time-consuming task. Longer lease terms ensure the asset's stability. Banks, for example, typically have long lease terms that ensure consistent and reliable returns.

Rental Income

Rental yield indicates return on investment in both commercial and residential properties. While rental yield is calculated by dividing the annual rental received by the property price, an investment property should generate income as well as increase in value, if possible. When the rental yield is higher, it indicates that the property is producing higher returns. Rental yields for office spaces are currently around 7%-8%, 5%-7% for bank properties and retail, and 8%-9% for warehouses.

Tenant Information

Professional advice is always the best way to choose a tenant. Investors should evaluate the tenant's financial background and quality before finalizing a deal. This aids in ensuring that rent is paid on time. It is also critical to understand how the tenant intends to use the commercial property for lease in ahmedabad. If the tenant intends to use it as an office or a headquarters and has spent a significant amount on furniture and fittings, it indicates that he or she has invested more and that there is a good chance that they are seriously interested in the property and will stay for a long time.

Also Check: How to Lease Commercial Property in India

Property Appraisal

While studying data from the most recent transaction in the building and area can help one understand the valuation of a property, speaking with property consultants and property owners in the building can help one better understand the valuation of properties in a locality. Because it is already leased, expect a 5%-10% premium over the value of a vacant property. If the rent is inflated but the return is good, you should not buy it. Not only should the rental yield be considered, but so should the property's value. 

Lock-in

The period during which a tenant is unable to vacate the property is known as the lock-in period. If he vacates the property, he may face severe penalties (usually the rent till the end of the lock-in period). A longer lock-in period demonstrates greater stability and commitment on the part of tenants.

The Cost of Maintenance

The maintenance costs borne by an incoming owner should not be excessive. It is critical to calculate one's net rent after deducting all maintenance costs and property taxes. Then compute the net return on investment.

Occupancy of the Building

Higher building occupancy means greater asset stability and a greater likelihood of finding another tenant if the current tenant vacates for any reason. Because the building occupancy is high, the property can be leased again if tenants like the location.

Property Quality

Grade A properties are a better investment option because they attract quality tenants and have a consistent resale value. Buyers are always looking for Grade A properties. The property's common areas are also well maintained. As a result, Grade B or C properties should be considered only if the tenant quality is high and the building is well maintained.

Also Read: 5 Simple Steps to Ensure Your NRI Real Estate Investment Is a Success