Oftentimes, especially in a really hot market, Landlords could be buying a house with tenants or purchasing an investment property and absorb, or inherit, the Tenants that are already in place. While this can sound intimidating, it doesn’t have to be a stressful or complicated process. In fact, when handled correctly, it can even make your life easier because you start earning rental income from day one.
That said, it’s important to be proactive when dealing with inherited Tenants to avoid issues and to ensure that you and your property are protected. To help you do that, here’s a step-by-step guide for what to do before and after you purchase an investment property with Tenants in place.
Review and Verify the Terms of the Lease
Before purchasing a property with Tenants in place, it’s important to first see a copy of the Lease between the current Landlord and Tenants. This Lease will stay with the property, and you’ll be bound to follow its terms until the end of the Lease period. As a result, it’s important to review the terms before purchasing a property.
In addition to asking for and reviewing the Lease, it’s also a good idea to use an Estoppel Agreement to verify the terms of the Lease with the Tenant. While it’s uncommon for a landlord to forge or misrepresent Lease terms, it does happen. To avoid this, Landlords should always use an Estoppel Agreement to ensure that they know the terms of the current Lease.
When reviewing this information, make sure to confirm that the monthly rental income is what you expect it to be. Sometimes sellers will advertise a market value for rent when in fact the Tenants in place are paying a lower rate.
Communicate with Tenants
As with all Tenants, you want to establish a good Landlord-Tenant relationship with any Tenants that you inherit. Communicating well with them from day one is a good way to do this. Here are some tips for how to do this:
- Introduce yourself in person once you’ve purchased the property. In this initial meeting, let Tenants know who you are, who they should contact with concerns or for repairs, and any improvements or plans that you have for the property. This will ease the Tenants’ concerns about having a new Landlord and let them know that you’re going to take care of the property.
- Send Tenants a Change of Management Notice and Welcome Letter. This will give them your information, contact details, and any information they need to know about the change in ownership.
- Communicate with Tenants about your expectations. A common issue for Landlords is inheriting Tenants that have gotten into bad habits with a prior Landlord – for example, rent consistently being late without late fees. To avoid any confusion, be clear about your expectations from the start – for example, letting Tenants know that late fees will be enforced for rent that’s not paid on time or those pet policies will be strictly enforced.
Screen Tenants before Renewal
When you inherit Tenants, you have to follow the terms of the lease until the end of the Lease Period, and you have to comply with renewal requirements. That said, you’re under no obligation to renew the lease with the current Tenants.
If you’re considering renewing the Lease, it’s important to Screen Tenants before doing so. We recommend going through the screening process just as you would when screening a brand-new Tenant. This means having the Tenant complete a Rental Application and conducting a thorough screening, including a background and credit check.
Are there any legal risks associated with buying a house that has tenants living in it?
Buying a house with tenants can be a great way to get started in the property market. However, there are a few legal risks to be aware of before you make an offer.
For starters, you need to make sure that the current tenants are on a fixed-term lease. Otherwise, they may have the right to stay in the property for as long as they want, even after you become the new owner. You also need to be aware of your rights and responsibilities as a landlord under state law. These laws can vary from state to state, so it’s important to do your research before buying a property with tenants. Finally, remember that you’ll be responsible for any damage caused by the tenants while they’re living in your property. So, if you’re not prepared to deal with potential repairs or legal issues, buying a house with tenants might not be the best option for you.
Have Tenants Sign a New Lease Agreement at Renewal
While you’re bound by the terms of the Lease that’s in place during its term, you don’t have to keep the same terms or agreement at renewal. If you do decide to renew a Lease with Tenants, it’s a good idea to have them sign a new Lease that you’re comfortable with and that has all the necessary terms.
As discussed above, you will need to comply with the renewal requirements of the Lease, but once it’s time to renew, we recommend having the Tenants sign a new Lease Agreement that you created and trust.
Evaluate Rent Prices and Consider Rent Increases Before Buying a House with Tenants
If Tenants have been in place for a long time, there’s a good chance that the rent they’re paying is well below market value. As a result, it’s important to evaluate local conditions, determine what the rental prices should be, and, based on the Lease terms, determine when a rent increase will be allowed.
Even if a rent increase is necessary, be thoughtful about how you want to go about it. For Landlords in multi-unit buildings, you might want to do a gradual rent increase to avoid having a lot of Tenants leave and a high vacancy rate. For any rental where the rent price is well-below market value, Landlords should weigh the pros and cons of a major rent increase. Sometimes gradual increases can be a good way to keep good Tenants in place while still slowly getting the rent up to market value.
While inheriting Tenants comes with some risks, proactive Landlords can help minimize risks and increase their chances of having a good experience with any absorbed Tenants. And, to make the process even easier, visit ezLandlordforms.com for a Change of Ownership Form, Screening Services, and to create your new Lease.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.