Acquiring a rental property with tenants in place is not only convenient but also a promising opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. However, it’s important to realize that buying a property with current tenants also brings its own set of challenges. To take full advantage of this opportunity, it’s important to educate yourself about the process and potential pitfalls.
Conducting Due Diligence
The quick cash flow and turnkey setup of buying a leased property may appear to be an attractive choice for your next investment. However, it’s crucial not to assume that just because a property is leased, it’s in good condition or the tenants are responsible and pay on time. Instead, make sure to do your due diligence to verify that the leased property is a sound investment.
When evaluating a leased property, the current lease agreement is among the first things you should inspect. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous 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. In rare cases, the tenant may agree to terminate their lease after the sale, but this is not the norm. Most of the time, it’s important to know which existing agreements will govern your new investment.
Assess tenant payment history and lease terms
In addition to reviewing the existing lease, it’s crucial to carefully screen the current tenants before acquiring the property. Treat this screening as if the tenants were first-time applicants, performing background checks, credit checks, and confirming their payment history and references.
Additionally, confirm with the current owner or landlord that the tenant’s security deposit has been paid and is kept in a separate bank account.
Inspecting the property with tenants in place
Besides screening your tenants, it’s important to perform a comprehensive evaluation of the property. To gain a clear understanding of the property’s condition, you’ll need to see the house and yard in person.
Given that tenants are living on the property, you should be cautious and determine how attentive they are to cleanliness and maintenance. Don’t forget to ask the current owner about any past or present insurance claims, particularly if they were caused by the tenants. Excessive insurance claims may complicate getting insurance for the property once it’s sold.
If all the details are in order, you could have found an ideal tenant-occupied rental property. 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.
Managing a property can be quite demanding, particularly if you handle everything yourself. Let the team at Real Property Management Nampa take over the day-to-day tasks for you. For more information about our property management services in Emmett and nearby, contact us today or at 208-960-0660.
Originally Published on March 12, 2021
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.