Long-term V/S short-term leases: What is a better way to rent your property?
Commercial real estate leasing can be a lucrative investment strategy for real estate property investors. However, you need to factor in various aspects like the key terms of a lease agreement, including the length of the lease, the rent amount, any rent increases, and the tenant's use of the property. It's also important to consider the financial viability of the tenant, including their creditworthiness and their ability to pay rent on a timely basis.
Talking about the length of the lease, we can divide commercial property leasing into two categories – short-term and long-term. While there is no definition of when a lease turns from short-term to long-term, the commonly accepted definition is that a Short Term Lease is usually one that does not exceed two-three years. Anything more than that is considered to be a Long Term Lease.
If you are planning to invest in commercial projects and are wondering whether you should adopt a short-term or long-term leasing strategy, then you are in the right place. In this article, we will discuss the differences between these leasing strategies to help you make a decision.
The pros and cons of short-term leasing
Commercial short-term leasing refers to renting out commercial office spaces, shops, or other properties for a limited period, typically ranging from several months to a few years. This type of lease agreement is often used by businesses that are looking for temporary or flexible space, such as seasonal businesses, startups, or businesses that are in the process of establishing a permanent location. Here are the pros and cons of adopting a short-term leasing strategy for commercial properties:
Benefits of short-term leasing
- Quick Turnaround: For landlords, a short-term lease can provide a quick turnaround of tenants and can be useful in a slow market or for a property that is between long-term tenants.
- Lower Maintenance Costs: There may be less wear and tear on the property, which can result in lower maintenance costs for the landlord.
- Flexibility: Short-term leasing allows landlords to rent their properties for a shorter period, giving them the flexibility to adjust to changes in the real estate market or to make changes to the property if needed.
- Improved Market Responsiveness: By offering short-term leases, landlords can respond more quickly to changes in the real estate market and adjust their rental rates accordingly.
- Lower Risk of Tenant Default: With a short-term lease, landlords face a lower risk of tenant default, as tenants are typically only committed to paying rent for a shorter period.
- Easier Property Management: Landlords may find it easier to manage their property, as they are not locked into a long-term agreement with a tenant.
Concerns with short-term leasing
- Uncertainty in Rental Income: Short-term leasing can result in uncertainty in rental income, as landlords may have to constantly search for new tenants to fill their property.
- Increased Marketing and Preparation Costs: The constant turnover of tenants in short-term leases can be time-consuming and expensive.
- Tenant Creditworthiness: There is a higher risk that tenants may not be able to pay rent on a timely basis, which can result in financial losses for the landlord.
- Increased Legal Costs: With a high turnover of tenants, there may be increased legal costs associated with negotiating and drafting new lease agreements.
- Higher Risk of Tenant Turnover: Landlords face a higher risk of tenant turnover, as tenants may choose to move on to other properties once their lease expires.
- Reduced Negotiating Power: Landlords have less negotiating power when it comes to securing favorable lease terms, such as the length of the lease, the rental rate, and any restrictions on the use of the property.
The pros and cons of long-term leasing
Commercial long-term leasing refers to the rental of commercial properties for a substantial period, typically ranging from several years to several decades. This type of lease agreement is often used by established businesses that are looking for a permanent location, or by landlords seeking to secure a reliable source of rental income for an extended period. Here are the pros and cons of adopting a short-term leasing strategy for commercial properties:
Benefits of long-term leasing
- Stability and Security: This is one of the biggest advantages of long-term leasing. A long-term lease provides a reliable source of rental income for an extended period, which can help secure your investment and achieve your financial goals.
- Predictable Cash Flow: Long-term leases provide landlords with a predictable source of rental income, which can help them to plan their finances and investments more effectively.
- Lower Marketing and Preparation Costs: With Landlords can avoid the time and expense associated with continuously preparing and marketing the property for new tenants.
- Improved Negotiating Power: Landlords have more negotiating power when it comes to securing favorable lease terms, such as the length of the lease, the rental rate, and any restrictions on the use of the property.
Concerns with long-term leasing
- Risk of Default: While long-term leases provide landlords with a reliable source of rental income, they also increase the risk of tenant default, as tenants may be unable to continue paying rent over an extended period.
- Lack of Control Over Property: Long-term leases may limit the landlord's ability to make changes to the property, as tenants may be entitled to specific terms and conditions regarding the use of the property.
- Market Conditions: If the real estate market changes during the course of a long-term lease, landlords may find it more challenging to rent the property at a favorable rate when the lease comes up for renewal.
- Reduced Flexibility: Landlords may have reduced flexibility, as they are committed to renting their property to a tenant for an extended period.
Which is the better option?
For some investors, short-term leasing may be a more attractive option, as it provides greater flexibility and the ability to adjust to changes in the real estate market. Additionally, short-term leasing can be a good option for investors looking to generate higher rental income, as short-term leases typically command higher rental rates.
On the other hand, long-term leasing can be a good option for investors seeking stability and security in their rental arrangements. With a long-term lease, investors have a guaranteed source of rental income for an extended period, which can be useful for planning their finances and investments. Additionally, long-term leasing can provide greater stability and security for tenants, which can make the property more attractive to potential tenants and reduce the risk of tenant default.
Ultimately, the decision will depend on the individual investor's investment goals, market conditions, and risk tolerance. It's important for investors to carefully consider these factors and consult with a professional real estate advisor before making a decision.
Commercial real estate investment in Pune
In recent years, Pune has gained popularity as a thriving real estate market. Real estate in Pune has grown rapidly due to factors like the city's expanding economy, growth in the IT and automobile industries, and the increasing popularity of Pune as a destination for education and tourism. If you are looking to invest in a commercial project in Pune, then you need to make sure that you analyze the market and identify locations and property types carefully. Before you start looking at commercial projects in Pune, think about the type of property you want to invest in, its demand, lease amount, lease period, and other factors.
BramhaCorp is a trusted name in real estate in Pune. If you are looking for a commercial shop in Pune, an office space, or any other commercial property, BramhaCorp has evolved as the go-to name. You can look at its commercial properties including BRAMHACORP BUSINESS PARK at New Kalyani Nagar or BOULEVARD TOWERS at Pune Camp for offices and showrooms in the prime location in the city.