Buying a home can sometimes be a very complicated science.
There are tons of factors that must be considered before making any kind of decision, like the price, the location, and the general condition of the home.
Absolutely everything must be accounted for when in the process of purchasing a rental property.
One of the things that can have a very large impact on someone purchasing an investment property is whether it has existing tenants.
Purchasing a tenant-occupied property can be difficult and tedious for the property owner and can lead to some disputes. The process is very tricky, but it can have many benefits, like creating a source of rental income.
In this guide, we will be going over the complete process of purchasing a property with existing tenants. We will also go over some benefits and drawbacks to purchasing a house with tenants.
So, to get started, let's go over how a landlord finds themselves purchasing a property with existing tenants.
Buying a Property with Existing Tenants
When real estate investors are looking to purchase a rental property, they are typically vacant. This means that the investor or the real estate agent is responsible for searching for new tenants. They are also responsible for fixing up the property to make sure that it is ready for new tenants.
However, sometimes the property isn't vacant. This means that there are existing tenants living on the property. These tenants have an existing lease agreement that was formed with the previous landlord.
This is where the main issue arises. Although the property has been sold to a new owner, the tenants still have the same rights as before. This could very well be something beneficial, but it could also have some drawbacks.
In the next section, we will be going over some of the general pros and cons of buying an occupied property.
Pros and Cons of Purchasing an Occupied Rental Property
Making this kind of decision is very far from easy. For this reason, we have listed below some important pros and cons to consider when deciding whether buying a house with tenants is a good idea or not.
Pro: Immediate cash flow
One of the most notable benefits of buying a property with existing tenants is that you will enjoy an immediate rental income. This is because the tenants that occupy the rental property already pay rent, and will just be transferring those payments to you.
This is a great benefit because it means that you will not need to spend any time occupying the property. Occupying the property includes many landlord obligations like finding tenants, drafting a new lease agreement, searching for property management companies, and much more. All of this is avoided if you simply pick up from where the previous owner left off.
Pro: The Property is Ready for Tenants
Another notable benefit of purchasing tenant-occupied properties is that the property is suitable for tenants. This means that you have purchased a safe and habitable property that is ready to be rented out as soon as the current tenants' lease term expires.
So, as the new landlord, you probably won't have to repair anything on the property for future tenants. This saves new owners or property managers tons of time and money immediately after purchasing the property.
Pro: Insight Into Property Performance
The third important benefit of purchasing a property with existing tenants is that you can have a better idea as to how the property performs. What this means is that the new property owner will know a lot more about the logistics of the property they are purchasing.
When an investor is purchasing a property without tenants, there is no guarantee that it will bring an effective cash flow to the investor. However, by purchasing a property that already has tenants in it, the investor knows so much more about the tenants' payment history, how well the property is taken care of, and how the tenants treat the property and management. This information is extremely valuable as it saves you from having to research all of this information on your own.
Con: Removing Tenants is Not Easy
Although most landlords who purchase a property with existing tenants decide to keep those tenants, some may choose to remove them and search for others. In these cases, the process is very complicated and can lead to various problems.
One of the main roadblocks is that the original lease agreement is still legal. This means that all of the terms and conditions of the lease agreement must be upheld by the new landlord. So, if the new owner wants to make any sort of changes, they must wait until the lease expires or have the original tenants agree to the new terms. You must also make sure that anything you are doing is in accordance with state and local laws regarding landlords and tenants.
Con: Uncooperative Tenants
Another very serious drawback of purchasing a property with tenants already occupying it is that you run the risk of having uncooperative tenants. Uncooperative tenants are not good because they will not work with the new landlord for anything.
For example, uncooperative tenants may be accustomed to one form of paying rent and may not want to change that way. This could cause the landlord to lose a lot of time and money trying to accommodate the tenants' desire to continue paying rent the original way.
Con: Legal Risks
Lastly, a con of purchasing a property with tenants is that you take over all of the legal responsibilities. This means that the new landlord is immediately liable for anything on the property that does not meet legal requirements.
This is typically not the case, however. Landlords generally do a good job of maintaining the property and making sure that it is up-to-date with everything. Also, it is common for new landlords to conduct an inspection of the property before purchasing it. This way, you can find out about any legal liabilities before even committing to the purchase.
Now that we know about some of the general pros and cons associated with purchasing a property with existing tenants, let's go over some other things that are important to note before doing so.
What to Know Before Purchasing a Property with Existing Tenants
After reading through the various pros and cons of purchasing a property that already has tenants, there are still some other things that are useful to note. Below, we have included a few bits of information that are important to note for any landlord purchasing an occupied property.
Know the Landlord Obligations
Whether the landlord is purchasing a vacant or occupied property, it is important to be familiar with their obligations. In most states, landlords are obligated to maintain a safe and habitable environment within the property.
This may include things like:
- Maintaining common areas within the property
- Ensuring that all structural elements are sound and safe
- Providing access to running water and heating/air conditioning
- Making sure all electrical, plumbing, heating, and ventilation systems are in order
These are just the general duties of the landlord and they can expand greatly from here.
There are also many things that you can do as a landlord to help maintain the relationship with the tenants. One of the most effective ways to maintain a healthy relationship with your tenants is by keeping an open line of communication. Start your experience off on a positive note by introducing yourself to your tenant and giving them any information they'll need to know about you.
Another helpful way to maintain a healthy relationship with existing tenants is to give proper notice before doing anything. This includes things like rent increases, inspections, and lease violations.
Do Your Homework
As a prospective landlord, there are many things that you should do before purchasing a property to make sure that everything is in good condition and ready to be taken over. As long as the former landlord did a good job on their end, everything should be fine.
However, if the former landlord did not do a good job, it is your duty to correct any mistakes. The first thing that you should do is read over the lease terms. This is a good starting point because you will have to uphold this exact lease when you take over.
Then, you may want to look over rent payment receipts from the current property owner so you can know about the tenants' payment consistency. After that, you should closely inspect the property to make sure that there are no legal risks to be worried about once you purchase it.
Finally, you should open a healthy relationship with the inherited tenants. This is extremely beneficial in the long term and can potentially save landlords a lot of time and money.
Not sure how to begin this relationship?
You can send the tenants a landlord introduction letter. Find a template for your own introduction letter at DoorLoop's Resources Page.
Verifying the Lease Agreement
Lastly, it is extremely important that the new landlord has the lease agreement inspected. They should make sure that it complies with all local landlord-tenant laws. It should also be inspected to make sure that it is fair with both the tenant and the landlord.
Apart from that, the security deposit should also be verified. Since it is being transferred to the new landlord, it must show up on the settlement statement. From there, you must ensure that the amount is appropriate and lines up with any local or state limits.
In conclusion, buying a property with existing tenants living within it can be very tricky. There are a plethora of things that must be paid attention to and it can carry a ton of risks. However, there can also be many benefits associated with it. For this reason, it is important to carefully make this decision and consider every pro and con before purchasing.