How to obtain income from leasing a land?

One of the forms of investment best known for its stability in operation and profitability is real estate leasing, or better known as real estate.

The major investors are inclined to purchase real estate, especially in the purchase of land in Blue World City because they are a safe option, which allows to acquire assets, whether for commercial, industrial or residential purposes.

In addition to increasing its value over time, land can generate short-term profitability through leasing, thus contributing to the capitalization of the owner to carry out subsequent projects or recover the investment in its acquisition.

To know how and where to buy land in order to rent it later and what the requirements are, we have prepared a short guide with advantages, disadvantages and everything you need to start making money with them.

What is the lease? General terms

The lease is any contract, agreement or relationship that is entered into between two contractual parties, by means of which an assignment takes place – in this case, a real estate asset – for a specified period of time.

The purpose of this process is that the party that makes use of the leased asset must make an economic consideration.

Taking as reference what is mentioned in Article 114 of the Income Tax Law, in its title IV in chapter III:

“Leasing income is considered to be all those from granting for consideration, the use or temporary enjoyment of real estate”.

The parties involved in the lease are:

  • Lessor: is the owner of the property.
  • Lessee: is the person or company that pays for the use and enjoyment of the property.
  • Rent: is the amount of money that the tenant pays the landlord for the use of the property.
  • Subtenant: it is a modality in which the lessee —with prior authorization from the lessor— grants total or partial use of the property to a third party.

The lease can be provided in goods or services, however, the sector most inclined to this type of contract is real estate.

The real estate rental market ranges from a house, to commercial premises and, above all, land. This allows the owner to obtain an additional return for a specified period.

Advantages and disadvantages of land leasing 

Like all types of purchase, acquiring a property must be carried out after having carried out an analysis of the advantages and disadvantages that will be obtained when integrating it into the personal or company assets.

Leasing land is an economic benefit derived from its acquisition, which entails rights and responsibilities arising from the contract entered into with the lessee.

Advantage

Among the main advantages of leasing land or any real estate are:

1. Preserve possession of the property

By being the owner, the property of the property is preserved, which allows it to continue being included in the balance sheet and forming part of the assets.

This is very useful when you want to acquire financing in which some good as collateral is required as a requirement.

Keeping your property and earning additional income is a great way to protect your wealth and save for retirement.

2. Profitability available to reinvest

The rent —product of the lease— becomes liquidity for the owner, who can reinvest in the acquisition of more land, in improvements to the property or use it for other purposes.

When entering into a contract, it is possible to make plans with the amount received, since said amount and the specific period in which it will be obtained are known.

Additionally, as time passes, the land will increase in value, generating a higher return on investment and excellent profitability.

3. Simple leasing procedures

This procedure is very simple. It can be carried out through a notary, public notary or by the intervention of a private lawyer, who will enter into the contract privately.

The lease is a legal document by means of which the agreement between two parties to rent a space is made official, with clauses that specify the changes or the use that the tenant will give it.

Although the procedure is simple, it is important to take into account the expenses that the process will generate, that is, the attorney’s fees.

Disadvantages

Among the main disadvantages of leasing land or any real estate are:

1. Poor construction and wear 

Depending on the clauses of the contract, the lessee can build on the land, however, the infrastructure that is developed there belongs to the owner.

For this reason, some tenants — especially those who plan to stay for a short time — can build poorly on buildings so as not to invest too much in facilities that will not be their own, or that require high maintenance costs.

It is important to specify in a contract what and how can be built on a leased land. The rent of land franchises is usually the safest, because their buildings must meet certain quality standards.

Smaller businesses or businesses that do not require the land for a long time often choose to rent commercial premises.

2. Delinquency

Although the amount is periodic and fixed, the tenant may take time to pay, causing delays in the financial planning of the tenant r, so it is suggested to contemplate some type of penalty in the contract or charge for late payment.

It can also be useful to previously research the references of the tenant, and verify that the venture or business that will be put on the land is profitable.

3. Waiting time

If the area or location from which a land was acquired is not well chosen, the lessor may see his objective of obtaining short-term profitability postponed.

It will depend on the city which are the best areas to buy land, as these vary from place to place. You should consider what a tenant looking to build a profitable business is looking for.

Procedures and way of leasing a land 

Once a land has been purchased, the possession of the property must be proven. In the case of Yucatán, as in the other states, there are steps to follow to carry out the correct and secure deed manifested in the local Civil Code.

The leasing of land is a lucrative activity and all those people who obtain income in this way must be registered with the Treasury, generally under the leasing regime and issue Digital Tax Receipts by Internet (CFDI) for said income.

Likewise, the landlord must make his annual declaration in due time and form. If you obtain rental income, you can submit quarterly provisional payments for ISR and VAT, if applicable, according to the stipulations of the SAT. This includes natural persons.

Data that a land lease must have

It is very important that a contract is made to make the lease valid and start and it must contain the following elements:

1. Data and references of the parties

They are known as general data – or just “general” – of both the lessor and the tenant, these are:

  • Name
  • Direction
  • Telephone
  • Occupation
  • Civil status
  • Personal references

Do not skimp on the tenant details to avoid further communication obstacles. 

It is also important that both parties specify in subsequent clauses the means of communication that the parties will have if necessary.

2. Terrain specifications

Characteristics of square meters, vegetation count, constructions, condition and age of any existing structure within the land at the time of the beginning of the lease term.

It should be mentioned how the land should be delivered at the time the contract ends, or if an agreement has been reached for the construction of the same, considering that the lessor will also be the owner of said construction.

3. Duration of the contract

It is the delimitation of the period of validity of the contract, it includes the start and end date of the same. To determine the correct lease time, it is necessary to know the use that the tenant will give it.

Some owners decide to make contracts with a duration of one year even if this implies renewing several times, and others prefer to do it for 2 or more years to avoid constant processing.

The causes in which the contract can be terminated, or terminated early, and what will be the penalties to be applied in the event that one of the parties decides to conclude the agreement early, must also be specified.

4. Rights and obligations of the parties

Each party has rights and acquires obligations when forming part of the contract, therefore all the necessary clauses must be written to be able to establish them in their entirety.

For example, you can include clauses that determine the periods in which the owner will make maintenance to the land, adjustments or repairs. Similarly, as obligations of the lessee, he must be responsible for the property —not damage it or harm third parties—, as well as not use it for illegal activities.

5. Amount to pay for the lease

The amount that will be paid as rent for the use of the property must be clearly specified with letter and number in the contract, also making clear the special amounts, due to damage or damage that the property may receive.

Having this clear will help avoid misunderstandings and future lawsuits. This section must also stipulate the day that the payment must be made, as well as the way in which it will be made (transfer, deposit, check, among others).

6. Special clauses

They refer to all the special agreements that the lessor and the tenant may reach; for example, the possibility of a subsequent purchase of the land, by the second, after having passed a certain time stipulated by both parties.

Another special agreement could be that the landlord allows the tenant to retain possession of the buildings he has made, as long as he takes charge of the corresponding taxes and a purchase agreement is reached.

Where should I buy land to rent?

According to the financial objectives and goals, certain key points must be observed to invest in a commercial field.

It is important to go with experts who have options that fit each person’s investment project. There are real estate companies – such as BMF Inversions – with extensive experience in developments that are adapted to the needs of each client.

The location, proximity of services and other characteristics necessary to make a good choice, together with the possibility of financing and the security of buying with legal certainty are elements that we must consider before making a purchase.

So where should you buy land to rent?

The Mexican southeast is the best option to invest in 2021. In recent years the real estate market in this area has remained stable and on the rise. There are many investment opportunities in Yucatan and Quintana Roo mainly.

Thanks to its tourist and commercial potential, real estate in the southeast of Mexico is in the sights of national and foreign investors who want to buy land and grow their money.

The main cities that stand out for investments are: Mérida, Cancun and Playa del Carmen.

If you want to know the reasons, we invite you to consult the articles that we have prepared for you such as: land in Cancun: know the advantages of acquiring one, reasons to invest in Merida and real estate in Playa del Carmen, why invest?

Commercial lots, ideal for leasing

Now that you know the process and the benefits of buying land to rent, you can make a sound investment with great potential to generate extra income.

Finding the ideal terrain is easy if you approach companies with experience and professional advice.

At BMF we take care of your investment with high-value real estate projects. We have more than 25 years of experience and success in the field. We also have advisers with the knowledge to clear up all your doubts.