Rental Property Evaluation Requires a Careful Examination of the Leases

Posted on: August 26th, 2012 by admin No Comments

Successful investors in rental property need to know a great many formulas used in determining the value, income, expenses, taxes and return on investment of a property. None are more important in the purchase process and rental property evaluation than examining the leases currently in effect.

How Long Are The Lease Durations?

How much time is left on each lease? Long lease durations can be a good thing if the rents are at market levels, and they can be a bad thing if they're too low.

Are The Rents At Market Level?

As stated, long leases can be a good thing if they're set at the right price. A comparison analysis should be made of area rents for similar properties. If the property you want to purchase has extensive periods until lease expirations and lower than market rents, you may want to consider buying elsewhere.

Are the Rents Really the Rents?

Don't just assume that the tenants are paying what's shown in the lease document for rent. Landlords have been known to allow cuts in the rental payments in return for favors and services. Don't buy a property only to find out that half the tenants are doing chores and favors for the landlord in return for reductions in the lease document rental amount.

Are the Tenants Holding Options for Renewal?

Do the leases have a clause giving the tenant the right to renew the lease at expiration? If so, what does it say about the rent? Be sure that any renewal option clauses adequately cover your interests in how the rent will be set for the new lease period.

Are There Automatic Rate Escalator Clauses, And Are They Adequate?

This is more of a factor in commercial and office space rentals, but it can be used for residential leases also. In longer leases, there can be an escalator clause that sets automatic rent increases based on inflation, a set percentage or amount, or some other factor. Be sure that, if there are any, they are sufficient for the current market and inflation conditions.

As you can see, one needs to be careful and diligent in their purchase of real estate rental investment property. The good part about leases is the ability to accurately predict future income. Just examine them carefully to make sure that it's sufficient income.

Leave a Reply