Purchasing a Property with Existing Tenants

With all the ins and outs of purchasing a new rental property, there may be some confusion regarding the purchase of tenanted properties. If you are considering purchasing a property with existing tenants, here are some important things to know.

Obtain the Rental Agreement

It’s important to obtain the rental agreement before purchasing a tenanted property. Your new ownership will not change the terms of the tenants’ existing lease. Until the end of their lease term, you will be unable to raise rent, evict tenants, or instill any new terms within their existing rental agreement. 

Carefully read over their lease and any supporting documents to ensure you are able to provide the terms set out in their lease. Some rental agreements may state that the landlord is responsible for utilities, internet, or even lawn care and other items, which is important to know before closing. If any items set out in the rental agreement seem unlawful or suspect, consult with the current owner. The current owner may be able to modify the language in the agreement.

Once you’ve looked over the lease agreement and verified its contents, you can be more confident in your purchase.

Secure Any Deposits and Records

Typically, tenants will transfer a last month’s rent deposit and a key deposit. Once you’ve purchased the property, ensure the previous owner has forwarded these funds to you, so you don’t end up paying the costs later on. Obtain any written records of these deposits as well, so you’re certain of the exact amount being deposited. We further suggest obtaining any records or receipts of previous rent payments to be sure the tenants are in good standing.

Verify the Property’s Original Condition and Inclusions

It’s important to know what exactly was included with your purchase and the condition of the property prior to the existing tenants’ move in. Try to obtain any photos and inspection reports dated before the commencement of the tenants’ lease. If the tenants have damaged the property, it will be tedious to prove who was at fault if you don’t possess documentation of the property’s original condition. If possible, arrange a meeting with the tenants to inspect the property prior to closing.

Research the Market  

Depending on the situation, it may be easier to purchase a tenanted property. You wouldn’t need to bear the costs of a vacant unit, such as advertising for new tenants and utilities. With no sunk costs, you would be earning income from the first day.

However, it’s worth researching the current rental rates in the area. If the tenants have been residing at the property for some time, they may be renting at below market rate. Always keep the market in mind and compare current rental rates to the rates of tenanted properties.   

Consider a Property Management Service

Finally, if you’re considering purchasing a property with existing tenants, a full-service property management group can make this transition noticeably easier. A full-service property management group can provide seasoned advice in property ownership while looking after all of the property’s day to day needs.

Have more questions about property management, leasing or real estate? Ask our experts or follow us @clavispm