Acquisition tenants can be an added bonus when purchasing a rental property. The landlord inherits a paying tenant as soon as the house closes, allowing them to start making money right away. After closing, most mortgages allow for up to 60 days before the first payment is due, depending upon the terms of the loan, so this is a great time to save up before the first payment is due.
However, the inherited tenant can also come with complications. An acquired tenant who is not paying their rent, is otherwise violating their lease, or who is causing other problems can mean early headaches on a newly purchased property. This tenant who came with the property was not of your choosing, and so you never know what sort of tenant you are going to get. With a problem tenant, you will have to make the effort to rectify non-payment or other violations, or to proceed through the eviction process. Even with a non-renewal at the end of the term, you will have to work around one tenant moving out while you make preparations for a new one to move in. This can cost you time and energy if your inherited tenant is not working out.
How good of a deal are you getting?
Will your profit margins on this property be enough to offset costs that you will have to expend in the worst case scenario? If not, are you willing to risk a financial hit to remove your inherited tenant if necessary? Don’t forget that your time and effort also have a value, so consider these costs as you negotiate your purchase.
What do you know about the inherited tenants?
Ask yourself, if you encountered the current tenants as applicants for your property, would you rent to them? If not, remember that you cannot simply get rid of these tenants for personal reasons. The current lease in place must be followed, and you will be restricted by those terms.
How is the inherited paperwork?
Take a good look at the lease agreement that is already in place. If you have owned other properties, you know the value of an airtight, comprehensive lease that covers every possible situation. Does the lease that is in place address all of the details it should? Or will the existing arrangement make it hard for you to reprimand the inherited tenant if they are creating issues.
Is the unit affordable?
Be sure to research comparable properties; not just for the purchase price that you will pay for the property, but also for nearby rentals. Is the rent for the unit that you will purchase priced properly? This will matter more if the existing lease will be in place for several more months, or if the property you are purchasing has multiple underpriced units. If the rental is underpriced, factor that into your costs.
In some markets, housing prices have been on the rise, making it harder to afford real estate investments. Consider different options for your dollar. Sometimes a multiplex is a better investment, because of the opportunity to take advantage of multiple returns on your investment at once. Having a tenant already placed may help you qualify for your mortgage more easily, especially for those loans that are harder to get, as it shows that a portion of the monthly payment is already provided for.
State and local laws must always be kept in mind in acquisition tenant situations. Some state laws will favor the inherited tenant, while others give the landlord more wiggle room in this situation. This makes having an acquired tenant easier in some locations than others. Use this knowledge to help inform whether an inherited tenant is for you.
Now that you know about the tenants you may have just inherited or whether you should buy a property with current tenants, join us for our August Webinar for a Q&A about Acquisition Tenants!