Buying a rental property with tenants already in place is not only convenient, but it’s also a fantastic opportunity. The advantage of skipping renovations, advertising, and tenant screening is only the start. However, buying a property with existing tenants also comes with a few challenges that should be considered. To successfully seize this opportunity, it’s important to learn the process thoroughly and be aware of what to avoid.
Conducting Due Diligence
The immediate cash flow and ready-to-go nature of purchasing a leased property can make it seem like an appealing option for your next investment. However, don’t automatically assume that a leased property is in good shape or that the tenants are responsible and pay rent promptly. Instead, conduct thorough due diligence to confirm that the leased property is a solid investment.
One of the primary documents to review when considering a leased property is the existing lease agreement. When buying a tenant-occupied property, you inherit the lease the tenants signed with their former landlord.
As the lease is legally binding, you’ll need to be comfortable adhering to its terms until it ends or is up for renewal. There are instances when the tenant has agreed to end the lease once the property is sold, but this is not typical. In most cases, it’s essential to understand what prior agreements will govern your investment.
Assess tenant payment history and lease terms
Besides reviewing the lease agreements, it’s important to conduct a thorough screening of the current tenants before buying the property. Approach the screening as if the tenants were new applicants by performing thorough background and credit checks, and verifying their payment history and references.
Verify with the current landlord or owner that the security deposit has been paid by the tenant and is stored in a separate bank account.
Inspecting the property with tenants in place
In addition to screening the tenants, it’s vital to conduct a detailed inspection of the property itself. To get an accurate sense of the property’s condition, you’ll need to personally inspect both the house and the yard.
Since tenants are currently living in the property, it’s important to be mindful and assess how well they maintain the house and yard. Be sure to ask the current owner about any insurance claims, past or present, particularly those caused by tenants. Multiple insurance claims could make it harder to secure insurance on the property after the sale.
If everything checks out, you may have found a great rental property that already has tenants. Whether or not your new property comes with tenants, you must be ready to keep it in habitable condition, check that the electrical and plumbing systems are safe and functional, and ensure the building is structurally sound. Even though your new rental may already have tenants, once the sale is final, you are entirely responsible for the management and maintenance of the property.
Property management can be a time-consuming task, especially when managing it on your own. Let the team at Real Property Management Impact take over the day-to-day tasks for you. For more information about our property management services in Durham and nearby, contact us today or at 919-439-8989.
Originally Published on March 12, 2021
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