The vacancy cycle is one of the costliest parts of being a landlord – so what if you skip that step by purchasing a rental property that comes with tenants?
Buying a property that’s already occupied comes with a host of benefits and potential drawbacks, so we’ll walk you through everything you need to consider – from the state of the property itself to the existing lease agreements.
Before we break down everything you need to know, let’s take a moment to review what you should do before finalizing the sale.
Before Buying Occupied Rental Property
Never go into a significant purchase without doing your homework! Reading this article is a good starting point, but you should also ask the seller:
- What term length is listed on the existing lease?
- Have any tenants prepaid for rent? If so, who and by how much?
- When was the last time the property was inspected?
- Are there any existing complaints regarding the tenants, their behavior, or their timeliness in paying rent?
- Can I review a copy of the signed lease agreement?
- Who currently handles maintenance issues (electrical vs. plumbing vs. emergency, etc.)?
- When can I schedule a home inspection?
If you feel comfortable with the answers to these questions, you can feel more confident moving forward with the rental property purchase.
What Happens With the Existing Lease?
Rental lease agreements bind the landlord and tenant(s) to the property itself. In other words, your newly inherited tenant has to follow the terms outlined in their signed lease agreement until the contract ends – as do you. If possible, read over the lease agreement before purchasing the property to fully understand the duties you’re taking on, especially the ones related to utility bills and exterior maintenance (e.g., shoveling snow).
Bear in mind that you can’t:
- Immediately evict the tenant(s)
- Raise the rent
- Change the lease terms automatically
The existing tenant holds all the rights granted to them in the original lease. If they have a month-to-month lease and you’re looking to charge more, you must provide proper notice as your local landlord-tenant laws dictate. The same can be achieved for a long-term lease, though you may have to wait for the appropriate notice period.
It’s possible that the current lease agreement has language that ends tenancy if the property is sold, but you’ll need to verify that by reviewing the lease agreement(s). If you’re really keen to empty the premises, consider extending a cash-for-keys offer to your inherited tenants.
You may also be wondering about what happens with the security deposit. You’ll want to double-check the laws in your state, but in most cases this money should be transferred to you from the previous landlord. That money is the tenant’s, and if everything goes well then it should be returned to the tenant upon their move-out. Make sure that the security deposit is addressed as part of the purchase negotiations with the previous owner.
Your Obligations as a Landlord
If you’re an experienced landlord, the responsibilities you owe to your new tenants won’t come as a surprise – but let’s rehash what you owe your renters beyond the lease terms.
Rocket Mortgage lists seven of the most common landlord obligations, which include:
- “Complying with all state and local landlord-tenant laws, health codes, and building codes
- Maintaining a safe and habitable property for your tenants
- Maintaining the HVAC system, electrical, plumbing, etc.
- Ensuring the water heater works and that tenants have access to running water and heat
- Keeping the property free of environmental toxins such as asbestos, lead-based paint, and pests
- Maintaining the structural integrity of the building
- Responding to any repairs in a prompt manner”
When in doubt, remember that your role as a landlord is to provide safe housing for your tenants. That responsibility carries over even if you weren’t the tenant’s original landlord, meaning you could be held liable for anything that isn’t up to code.
That’s why it’s crucial to schedule a professional home inspection before purchasing the property. If the purchasing contract has not closed, then the current landlord would be the one to contact their tenant for a house inspection. They must adhere to the laws of the state on prior notice – which is usually 24-48 hours prior to the inspection.
The Pros and Cons of Buying a Property With Tenants Attached
Like with any investment, there are benefits and drawbacks to purchasing an occupied rental property.
The Perks of Purchasing Occupied Rental Property
Rocket Mortgage shares a host of benefits to purchasing a rental property with tenants in tow, including:
- No need to find tenants. Since the property is already occupied, you can save the time, money, and stress that seeking out a new renter would cost.
- Immediate rental income. Beyond saving money by not having to find a tenant, you’ll also start earning rental income immediately.
- Building up to code. Since the previous landlord was also beholden to the legal requirements for habitability, the building should be up to all code provisions. That said, be sure to familiarize yourself with your local landlord-tenant laws and property codes to protect yourself.
The Drawbacks of Buying Rental Property With Tenants in Tow
On the flip side, it pays to be aware of the downsides regarding this type of rental property purchase – namely:
- Inheriting legal risk. Once you own the property, you become liable for anything on it that doesn’t meet your local legal requirements. If the previous landlord didn’t take care of the property or its tenants, you could end up holding the bag.
- Honoring lease terms. You are bound to the existing lease and its terms, which could be unfavorable in your perspective. You won’t be able to change those terms until the lease expires. However, if there is a clause in the original lease regarding termination upon sale of property, that’s another story. In that case, a new lease would need to be written if you want the current tenants to stay in the rental.
- Removing a tenant isn’t easy. If you’re looking to evict the existing tenant so you can increase the rent, live in the property, or conduct an extreme makeover, you can’t. Also, evicting a tenant is a costly experience, so it should never be your first move.
The Documents You Need From the Previous Landlord
Proper documentation is key to property management success, so don’t be shy about asking for:
- A copy of all signed leases
- The property’s payment history
- Files on each renter (including their rental application and screening report)
- Maintenance request histories
- A list of outstanding maintenance requests by unit
- Home inspection reports
- The serial numbers, purchase date, and warranty information for any appliances included with the rental
- A copy of any communication sent to the tenants regarding the property sale and transition of management
Also, don’t forget that you’ll need to introduce yourself to your new tenants! Once the property is officially yours, reach out with a phone call, handwritten note, or email and make a connection with your tenants. Be sure to let them know how best to contact you with any issues, how you prefer rent to be paid, and any other critical information they may need from their new landlord. Take this opportunity to verify the tenant’s emergency contact information, all occupants of the unit (including animals), and their vehicle information to ensure the lease agreement is up to date.
From there, you can start an exciting, professional relationship with your new tenants!