Leased income properties

05/07/2019

By the term leased income properties, commonly known as investment properties, we refer to the properties acquired for investment, in order to obtain a monthly income for the owner, through the long-term or short-term lease. It is an investment as old as the practice of acquiring the property. The owner is usually responsible for the payment of possible mortgages, taxes and property maintenance, which may result from circumstances, such as violence. The lessee, on the other hand, besides the rental payment is responsible for maintenance from normal use, payment of municipal taxes, etc.

Ideally, the owner charges enough to cover the aforementioned costs and also enough to generate a reasonable profit. When there is a mortgage on the property, the investor must have the patience to cover the costs of the mortgage, so that later on the majority of the rent can generate a profit. In both scenarios, a landlord must be careful and keep pace with the general market outlook.

In addition, the property, beyond the profit of the annual income, may also acquire goodwill in the future, if its acquisition price was low, leaving the owner with an asset of value. As we mentioned in a previous article on real estate investments, according to the US Census Bureau, real estate in the US has risen steadily in value from 1940 to 2006. The same trend has been observed in Greece and although there was a substantial decline during the crisis in many types of properties, there has been a recovery in prices and total values.

Leased properties – Advantages

There are many advantages in purchasing a leased property, like in all kinds of investments, but the most important one is that it can directly provide a regular monthly income, which on the one hand can contribute to the maximization of the yields, and on the other hand can lead to long-term revaluation of the initial investment. The time prospect is, generally, about 10-15 years or more.

Unlike other forms of real estate investment, this monthly cash flow can also attribute in the financing of the purchase expenses, through a loan. In addition, in several cases of very central commercial areas, the owner can maximize its performance through the practice of "air". When a lease expires, the owner asks in advance an extra lump sum "air", for the renewal of the lease contract. This practice has been commonly used pre-crisis, although in recent years it has timidly re-emerged in specific areas.

This investment can serve as a good counterbalance to the stock market’s instability and can become extremely profitable.

Leased properties – Disadvantages

Like in every investment, there are also some disadvantages. One important disadvantage, when investing in real estate, is that they are not easy to liquidate. Another disadvantage is the property’s maintenance and the damages caused by tenants, more often in residential real estate, rather than commercial real estate.

Taxes are also an important deterrent, especially in those cases where the property is left without rental income.

Types of leased properties

All the leased properties, when they are in the right location and the right price can be suitable for investment. Some of them have higher yields, whether some others have lower yields. Investment properties that generate a good income, are those which are capable of ensuring the initial capital invested and also provide short-term depreciation of the initial capital. Below, we can see the most basic categories:

Leased residences

This category includes all the houses, such as apartments, detached houses, maisonettes, etc., which are purchased and rented to third parties as permanent residences.

Investments in leased residences usually involve minimal risk, when it comes to finding a lessee. On the other hand, however, they usually offer relatively low annual returns and are more likely to suffer damages from bad tenants, creating a cost that usually burdens the owner. In the last few years, at the real estate sector have come up buyers, who invest in the short-term exploitation of such properties through several electronic platforms such as Airbnb, Booking.com, etc. The residential properties are, basically, used as touristic accommodation, therefore they are taxed as rental properties, a fact which offers fewer taxes to the owners, as well as a higher return due to the daily, and not the monthly, lease.

Leased commercial properties

The market for leased commercial real estate is generally the area with the biggest investments, not only in amount but also in absolute numbers. This type of investment is considered to be one of the safest, offering an extremely low risk after proper research and study of the property’s performance calculation.

One of the biggest advantages on this category is that the upgrading of the property is usually done by the lessee, as well as the repair of the damages that may have been caused by a previous tenant. For example, a lessee who intends to use the property as a store or as office space will take the appropriate action to make the space operational, and the owner of the property will benefit from this upgrade.

The most important types of business and commercial real estate are retail shops, offices, logistics warehouses, and industrial properties. More detailed information on the leased commercial real estate is available here.

Tourist investment properties

The tourist real estate sector is a durable and dynamic part of the real estate market, because of the tourism development, especially in recent years. The basic types of property are hotels and country houses. The construction of new hotel units, as well as the renovation and reopening of older ones, attract a significant number of investments in tourist destinations throughout Greece.

The second most widespread investment in the field of tourism real estate, is the investment in holiday properties, mainly luxury, which are short-term leased during the tourist season. These properties, as well as residences, have an attractive tax treatment, which makes them offer high returns with a low payback time, and they are growing high demand, especially with the advent of Airbnb, Booking.com, etc.

Leased plots

Contrary to the widespread opinion, that land is a non-lucrative investment that cannot generate regular income, the fact is that an owner or investor of land may, actually, earn income from the rental of his land. The advantages of such investments are the lack of constructive costs as well as maintenance, management, renovation and reconstruction costs, and on the other hand, usually low retention taxes. In general, the ways that land can generate income are the following:

Plots, located on central locations, can be rented and exploited, for example as open-air markets or as parking spaces.

Another way to earn income from land, is the rental of the land and construction of property within it, at the expense of the lessee. The lessee is not burdened with the purchase cost of the land but focuses precisely on his business activity. When the lease expires, the construction is transferred to the landlord, unless there is an agreement that the property remains to the tenant. In case the building comes into the landlord's property, you need to pay special attention to the goodwill of the property, and the taxes that may arise.

Agricultural land, on the other hand, can be leased to local farmers for cultivation or to pastures for animal breeding. If the land is forestry, it could be leased to logging companies for harvesting the timber, of course after obtaining the necessary licenses from the competent agencies.

Another way to acquire income, is the lease of land for the use of renewable energy sources (for example photovoltaic parks, wind farms and so on), an investment that has been observed in recent years.

All the above, make the lease of land long-term, up to 50 years, a fact which offers the stability of income inflow to the owner. And of course, over time, the possession of a piece of land can acquire future goodwill.

So, let's see what we should notice when we purchase leased real estate:

Property’s location

The location remains the most important factor for the success of the investment, regarding leased property. It needs a middle-term or long-term picture of how the region is expected to evolve over an investing period, and thorough research of the ease of finding a new tenant, in case the old one leaves.

The proximity to amenities, to means of transport, to the neighborhood’s condition, to the view, etc., are important factors when choosing a property. The commerciality factor of an area, the existence of other commercial companies, easy access by car and means of transport, are factors that determine a good purchase of a retail property.

Proximity to transport hubs, motorways, tax-free areas, etc. play an important role in the valuation of industrial and logistics properties. The duration of the tourist season, occupancy and infrastructure in the islands, are some important factors that are taken into consideration when choosing the location of a tourist property.

Rental profile

The business and financial profile of the tenant, the time he wants to remain in the property or the time he is already in, are some of the factors that should also be studied with great attention and thoroughness.

The terms of the lease, the guarantees, the rent that receives a property, the costs of managing, maintaining and repairing of any damages that may be incurred by the tenant, etc., are some facts that someone should be aware of, from the beginning.

Property valuation

Property valuation should be based on comparative sales data of real estate properties with similar features for both new and old properties. It should also be based on an income approach defined by the expected cash inflows and the return of the initial capital.

In the final expected return, one should not forget to include any costs, depreciation, taxes, dividends, borrowing costs, etc. So, what it takes for a start:

Investment objective and horizon

The best thing for a good beginning in the investment field is to have an initial capital, if not all, at least a part of the total amount, to ensure access to finance and to cover the preliminary maintenance costs or any unforeseen costs.

Furthermore, the investor must have a clear investment horizon because the lack of clarity on what concerns the purpose of the investment, can lead to unexpected results, including economic hardship, especially if the investment is mortgaged.

Knowledge of prices and demand in certain neighborhoods, allows the buyer to find underestimated properties, and earn attractive returns.

For closure, any kind of leased property, commercial or residential, can be a good opportunity for an investment property. Commercial properties usually offer more financial rewards than residential properties, but both cases may emerge dangers. If you are not well informed of the investment on leased properties, then the best solution is to contact a professional, broker or valuer, in order to assist you with his knowledge and lead you to the right decision.