The most obvious advantage of real estate is that at the core of the investment lies a tangible asset. It can “touch”, it is real, we physically feel it – that’s the basis of our inner peace. The status of ownership and the ability to insure the property to minimize the risk of loss. Passive income provided by the lease.
Planning for a happy old age is a long – term investment. What you need to strive in the investment period at least 10-15 years? To reliability, transparency, predictable and stable cash flow.
The old fashioned way
To provide a rental stream, it is necessary initially to perform a number of actions: to begin to buy an apartment, then make repairs to it, to provide its appliances and furniture, then to find a tenant and sign a contract with him. To minimise legal risks, as a rule, this process involves realtors.
What we get at the output? First, it is familiar for us property type. We understand what apartment and where to look for tenants. Second, clear projected rental rate. This option has a low volatility that allows you to accurately calculate cash flow in the medium term.
You need to remember? Tenants are responsible and not. The average time of staying in one apartment is for 2-3 years. Therefore, the owner will have to consider the costs for elimination of moral and physical depreciation to maintain the liquidity of its assets.
On average, the yield from renting apartments is now estimated at 5-6%, the payback period reaches 18-19 years, which is comparable to rates at large banks.
Commercial properties (commercial premises, building a free appointment, offices), acquired for earn rental stream is not quite understandable for the public tool, but actively gaining momentum.
Initially the rental business began to develop in the market street-retail (retail premises on the main shopping thoroughfares) and was popular among professional investors.
This was due to the necessity of knowledge of the property market, allowing to hand over the premises in the lease for more favorable terms, and regular interaction with the tenant (in this case, it is not a natural person, with whom we can communicate on equal terms, and the organization of professional lawyers in the state). In addition, joining the club of owners of rental business was characterized by a high entry threshold.
Meet private investors
Now the rental business is not just a one-time investment tool and a whole new direction. And it is actively involved the developers themselves.
First, now it is the service we are offering. The investor can buy not just a property for rental business, and ready rental business. What does this mean in practice?
You can buy the premises with the tenant, i.e. the person has already been signed and registered lease agreement. The agreement recorded all the key parameters: the term of the contract, the lease payments, including indexation, certain conditions of termination. Also in the room is repaired either by the developer or tenant that is a private investor does not incur any expenses on interior decoration.
Premises located in business centers or on the first floors of residential complexes, which involves professional management company. Thus, all the current issues the tenant interacts with the UK without the involvement of the lessor.
Second, the expanded product line. It’s not just straight retail, but also building a free appointment and offices. What’s the pros: now on the market there are offers of offices to 30 and 50 m with an entry price comparable to similar areas of flats (6-10 million). Tenant office lease payment is an administrative expense, i.e. it does not depend on the patency of the business center, his income is unlikely to affect the reconstruction of the surrounding streets or a Parking ban on it.
Third, the rental business is also a great tax, as it allows for the possibility of registration of SP and, as a consequence, reducing the tax burden (6% of revenue component). What we have: the same with apartments entry threshold; minimal interaction with the tenant; high predictability of revenues, as the average term of a lease is 3-5 years and all the conditions prescribed in the contract.
Now on average you can buy a ready rental business with a pay-back from 7,5 to 8,5 years taking into account indexation (average rental yield of 12-14%).