Whether you’re a prospective, first-time landlord looking to purchase your first income property or adding to your growing real estate portfolio, there are a lot of factors to consider when evaluating if a property is right for you. While searching for a property, many focus on the location, size, and condition of the property –– all critical factors, to be sure –– there is a unique consideration for rental properties that often goes overlooked: current tenants.
Each investment property comes with its risks and rewards, which is especially true if purchasing a unit with tenants that predate your purchase. In theory, buying an investment property with existing tenants is ideal. It means no time spent attracting and vetting tenants. Instead, you have immediate cash flow. But the situation is rarely as simple as it appears.
An important reminder is this: if you’re interested in purchasing a property that is currently leased: the lease does not dissipate with the sale of the property. Leases are not tied to the owner, but rather to the property itself. This means that the lease remains attached to the house; if you purchase the property, you are bound by the covenants in the lease. You cannot legally raise the rent, modify clauses, or kick the tenant out simply because you are now the owner.
What does purchasing a rental property with current tenants look like? And should you do it?
Buying a rental property with current tenants can be helpful since you already have tenants paying rent. You won’t need to find and screen new tenants, saving time, and creating immediate cash flow. These are all hugely advantageous as a landlord, and make purchasing an occupied unit vert attractive.
As any landlord can tell you, not all tenants are created equal. When you inherit tenants, you inherit not only the lease but also the previous landlord’s tenant screening process, which may be lacking. Tenants may be behind on rent and unable or unwilling to pay on time, or otherwise troublesome. It’s worth considering the worst-case scenario that the owner is selling the property to offload problematic tenants.
How to Protect Yourself
If you’re earnest about purchasing a property that has current tenants, it’s vital to do your due diligence to find out if they are quality tenants. Follow a few simple steps to evaluate if this property, and its existing tenants, are the right fit for you:
- View the property to make sure it’s in good condition. It’s worth contracting a professional inspector to help ensure that you’re doing your due diligence and protect you and your investment in the long term.
- Ask the owner for rent payment receipts and tenants’ credit reports to see if the tenants are paying rent on time.
If you are still interested in moving forward after these steps, you should:
- Request a copy of the existing lease and review it thoroughly. (Consider comparing it to recommended leases, state laws, and even consulting an attorney if you feel it’s warranted.)
- Ask the owner to transfer the security deposit to you. This often-overlooked step is vital. If the owner doesn’t give you the deposit, you’ll still be responsible for returning the deposit to your tenants at the end of their tenancy. It’s in your best interest to ask the previous owner for it as a condition of the sale.
Is There a Work Around?
If you’re interested in the property, but the tenants, terms of the existing lease, or other factors make you disinclined to purchase with the current tenants, there are some workarounds. You can include a contingency in your offer that stipulates the property must be vacant upon purchase. If accepted, the seller is then responsible for breaking the existing lease legally before the sale.
Two notable exceptions are in the event you purchase a foreclosure property, or when a lease stipulates explicitly that the owner (the property’s seller) has the right to termination upon transferring the property. In all other cases, you will inherit the lease and tenants of the previous owner –– and the good or bad that comes with them.
As with anything in the landlord business, there is not a one-size-fits-all answer. Instead, you have to evaluate if the particular investment property, its lease, and current tenants are right for you.