Every investment property has its own set of pros and cons. This is true whether the property has a current renter or if the property is empty. However, when the property has current tenants, you have the added benefit of immediate rental income. However, it is important for investors to understand the drawbacks and advantages of purchasing occupied rental properties.
The Existing Lease Stands
A lease does not expire when the property is sold. Instead, it is a legally binding agreement that moves to the new owner with the property. This implies that if you buy the property, the lease remains “connected” to it, prohibiting you from raising the rent, adjusting lease clauses, or evicting the tenant. The exception is when the lease term indicates the previous owner has the right to terminate the lease if they transfer the property to a new owner or if you are acquiring a property in foreclosure. In this case, you should consult your state’s rules governing notice to vacate.
If you purchase the property and decide you don’t want the current tenant in the property –whether you want to inhabit the house yourself or you want to start with a clean slate–you may make an offer that is contingent upon the property being unoccupied at the time of closing.
Because the renters have a legally binding lease agreement that states they can live in the property until the end of their lease, if you do not want the renter in the property, you may want to consider offering the renter cash in exchange for keys. The alternative is to purchase the property, terminate the lease agreement, renegotiate the lease, or “buy out” the tenant(s). However, this can be risky because the renters are not bound to agree, and you could end up in court if you try to evict the renter or break the lease agreement.
When do You Need a New Lease Agreement?
If the current renters are on a month-to-month rental agreement rather than a term lease, you have a few additional alternatives for changing the situation. You can request that your renters sign a term agreement or raise the rent, as long as you provide them with the notice required by state and local legislation. This may help you protect yourself and your investment while ensuring that you and your tenants understand the expectations. Of course, you will want to treat this situation the same as any other rental agreement and check the lease conditions to ensure that your renters do not engage in activities that go against the lease under the premise that the previous owner permitted it.
The Pros and Cons of an Existing Tenant
Buying a rental property that comes with existing renters is terrific in principle. You have the benefit of immediate revenue, no downtime hunting for the perfect renters to fill your vacancy, and a low risk of a vacant property in the very near future, assuming the tenants have lived in the house for an extended period.
Screening tenants is critical to protecting your investment. A bad renter can cause issues such as not paying their rent, damaging your property, and eviction proceedings. When you inherit tenants, you have to rely on the screening process of the previous landlord, which could be inadequate. The seller may have accepted any application (regardless of credentials) to ensure that the property was occupied and rent was coming in. Additionally, they may have a tenant who does not pay their rent on time. If you are considering purchasing an occupied rental property, be aware that the landlord may be selling the property to eliminate issues with bad tenants to an unknowing investor.
Other issues may arise with existing renters. The existing renters may be ideal tenants, but they may not be prepared to stay in the rental property under a new landlord. The sale of a rental property can be a significant change for renters. If your new renters have lived in the property for an extended period, they are likely to have settled and gotten happy with their present rent amount and lease conditions. However, suppose the former landlord did not raise the rent on an annual basis or did not conduct regular inspections. In that case, your new renters might object to the modifications you must make to safeguard your investment.
Before the Completion of the Sale
Whether you inherited renters that have a month-to-month agreement or on term lease, there are some things you must complete before you close on the tenant-occupied home to ensure their are no hidden issues and the transaction goes well. First, you may want to consider sending a landlord introduction letter to your new renters. This will help put your renters more at ease with the transition and provide the groundwork for a positive landlord-tenant relationship. It will also allow you to provide vital information to your new tenants, such as monthly rent collection and property maintenance.
Finally, because you are taking on the prior landlord’s responsibilities, it is critical that you adequately safeguard your property and yourself. You can reduce your risk by requiring your prospective renters and the property seller to sign an estoppel agreement and to transfer the tenant’s security deposit to you. An estoppel agreement allows future renters to specify existing lease conditions or property allowances. While the lease agreement will cover many of these issues in general, there are others that only an estoppel will handle. For example, if the renter makes a claim when moving out that the security deposit they paid was more than what is on file or that the refrigerator or washer and dryer are theirs and not part of the rental property. You can use the estoppel agreement to refute false allegations in certain circumstances. Knowing that the present property owner would view the Renter Estoppel Agreement should deter the renter from giving inaccurate information.
Purchasing occupied rental properties is an excellent option for investors that want to start earning rental revenue right away. Before purchasing a renter-occupied home, check the lease agreement and the seller’s rental screening process to qualify the present renters. Then, continue with a landlord introduction and draft an agreed estoppel agreement if you agree on the lease conditions and are comfortable with the present renters. If your present renters are on a month-to-month agreement, you have additional options for changing the lease as long as you comply with state and local laws. For additional information about rental properties in your area, or if you need professional residential property management, contact Real Property Management Consultants.
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