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      Leasing Advantages and Disadvantages of a Commercial Real Estate

      • 5 min read
      • Last Modified Date: September 1, 2023
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      When you look for a Commercial Property, you may wonder whether it will be worthwhile to lease out space. Though, in the beginning, you think of leasing it out, you surprisingly miss out on the trivial aspects of a lease deed in eagerness, and there it causes a stir.

      Hence, it is safe and wise as an investor to be wary of merits and demerits to avoid any obstacles and enjoy a seamless transition, where you can protect your interests.

      So, why not, you know? As a landlord or an investor, Leasing Advantages and Disadvantages you own while leasing out a real estate property.

      Types of Commercial Properties for Leasing

      A landlord leases out a property to any tenant in a commercial lease agreement, primarily to conduct a business activity. The Commercial Properties used for leasing include office space, retails space, restaurants, industrial buildings, and warehouses.

      However, it does include some other properties, like any space not intended for residential purposes such as self-storage facilities, recreational facilities, medical clinics, etc.

      Advantages of Leasing

      Preservation of Ownership

      In leasing, the lessor transfers all the risks and rewards incidental to ownership to the lessee, without the transfer of ownership of the specified asset. Hence, the ownership of the asset lies with the lessor.

      Tax-Benefit

      As the asset owner lies with the lessor, tax-benefit is enjoyed by the lessor by claiming the depreciation of the purchase and obtaining concessions under the Income Tax Act.

      Growth Potential in the Future

      The demand for leasing is steadily increasing because it is one of the cost-efficient forms of financing. Also, by leasing, economic growth can be maintained even during the period of depression. Thus, looking at this, leasing can have high-growth potential compared to other forms of business.

      Quicker Returns

      By leasing an asset, the lessor can access quick returns in the form of lease rentals compared to investments in other projects, which have a more extended gestation period to earn returns.

      Capital Appreciation

      Leasing is advantageous to the owner of the asset as the underlying asset appreciates steadily with time. As a result, the lessor can enjoy the benefit of capital appreciation of the support over some time.

      Gain of Salvage Value on the Asset

      Salvage value is the value of an asset after the depreciation, at the expiry of its useful life. The lessor, being the support owner, can realize the salvage value on the lease tenure’s expiry. You can enjoy the rental returns during the leasing period and the salvage value later.

      Disadvantages of Leasing

      Long-Term Investment

      Leasing a property usually takes a long time to recover the lessor’s cost in the capital outlay through the lease rentals. Thus, the lease rentals received by the lessor may not represent realized profits because of some inherent risks involved.

      Management of Property and Cash Flows

      The success in leasing out a property mainly depends upon the efficient use of cash flows, which becomes difficult to manage at times because of the unexpected market fluctuations.

      You indeed need the skill and expertise to manage the asset for more significant cash flows. There are online platforms like Assetmonk, which provide asset management before and post-investment process. All you have to do is invest in a commercial property in a good location, and you can lay back and enjoy the cash flow into your account.

      High-Risk of Obsolescence

      With the market’s ever-changing needs and preferences, there has been a drastic shift in the properties’ appearance and infrastructure. As such, being the owner of assets, the lessor might bear the risk of obsolescence before completing the useful life either due to wear and tear or due to outdated or rapid technological changes.

      You need to get acquainted with the market’s current trends to take the difficulties to your stride. You can avoid the risk of obsolescence by investing in trending commercial properties like condos, which have gained traction in recent times and are not going to let you down. Assetmonk is an online real estate platform that helps you bag trendy and upcoming investment opportunities like condos.

      Price-Level Changes

      Usually, every agreement once applied in the tenure can’t be changed. Despite the increase in the price of the assets due to inflation, the lessor gets only fixed rentals based on the previous costs.

      Chances of Damage of the Asset

      As the ownership is not transferred, only the right of possession to the asset is shared, so there might be a chance of using the help carelessly by the lessee. This, as a result, can make the asset not being re-usable after the expiry of the primary lease period.

      Types of Commercial Leases in India

      Full-Service Lease

      Full-service lease, otherwise called Gross lease, is the most popular among office buildings, industrial and warehouse properties. Here, the tenant pays rent, from which the landlord pays for all the expenses like property taxes, insurance, repairs, and maintenance costs, including janitorial and other utilities.

      As a tenant, you get to concentrate on the business leaving the property management to the landlord. Therefore, this type of lease is said to favor the tenant but indeed creates a win-win situation. The landlord receives a decent sum to compensate for payables, and the rent rises with the increase in the maintenance and utility charges.

      If you are the landlord and are worried about the expenses, you can limit the costs, called an expense stop. In this mechanism, you can pay for the maintenance and utilities within the prescribed limits above which the operating costs are passed on to the tenant. This creates a balance in the trade.

      Net Lease

      The tenant is passed with a lower charge of annual rent in Net Lease Agreements compared to a full-service lease. However, the landlord can pass other inherited costs directly to the tenants.

      With the net lease, a tenant can control the costs better by controlling the utilities’ use. Moreover, if there is no significant work at a given time, or the property tax rate drops, the tenants can save some money. Further, there are three types of Net leases.

      In a Single Net Lease, the tenant is bound to pay rent plus property tax. The tenant is liable to pay a portion of property tax proportionate to square footage being leased while the landlord covers all the other building expenses.

      This type of lease is beneficial for the tenant as it does not require the tenant to pay for the operating costs. As an owner, you only have an edge in collecting the property tax from the tenant.

      In a Double Net Lease, in addition to the rent and a portion of property tax, the tenant is liable to pay any sum accruing to property insurance. This type of lease helps you protect the property as an owner without paying for it.

      In a Triple Net Lease, most of the responsibilities are passed on to the tenants rather than the landlord. Regarding base rent, the tenants are charged for all the costs related to the real estate ownership. The tenant herein pays the property taxes, property maintenance, and other utility charges. This type of lease is most favorable to the owners. The expenses are all borne by the tenants, which makes the tenants more informed about the services.

      The Epilogue

      No doubt, getting involved in leasing commercial real estate or retail property is a good investment strategy. However, as a lessor, you require the necessary skills to work with the tenants comprehensively.

      Therefore, understanding the types of leases and the merits and demerits you possess as a lessor can increase the chances of success in the real estate sector. Also, knowing the benefits and implications forms an indispensable part of a lease deed. You can disclose the facts and avoid any interruptions while the property is leased out to the lessee.

      Having equipped with leasing nuances, you can go ahead to lease the commercial property and make the most out of it. Do you own one? If not, better late than never. Check out Assetmonk, a smart real estate platform offering curated high-growth commercial properties with an expected IRR of up to 21%.

      Leasing Advantages and Disadvantages FAQ’s:

      State one merit of leasing a Real Estate Property for the Lessor.

      The lessor under leasing an asset can access quick returns in lease rentals compared to investments in other projects, which have a more extended gestation period.

      Write one demerit of leasing a Real Estate Property for the Lessor.

      The success in leasing out a property mainly depends upon the efficient use of cash flows, which becomes difficult to manage at times because of the unexpected market fluctuations.

      What does Net Lease mean?

      The tenant is passed with a lower charge of annual rent in net lease agreements compared to a full-service lease. However, the landlord can pass other inherited costs directly to the tenants.

      When should you lease a real estate property?

      You can lease your real estate property to avoid trafficking out your money in the down payment.

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