October 27, 2021
What to Know When Buying a House With Tenants
Written by: Ruben Izgelov
What to Know When Buying a House With Tenants
For many investors, the prospect of buying a home that is already occupied with tenants is seen as beneficial. If you intend on renting out the property anyway, then all the hard work of listing the property, finding tenants and setting up a lease agreement are already taken care of.
However, when you buy a house with tenants there are also several things to keep in mind that will make the process more streamlined for both parties. Here, we are going to explore what to look out for when buying a tenant-occupied property and how to make the most out of your investment.
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Advantages of Buying a House With Existing Tenants
As stated, there are a number of advantages to buying a home with tenants. One of the principal benefits is the immediate rental income that this generates. This can save you a lot of money versus the time lag between purchasing a vacant property and then getting tenants moved in.
What’s more, as the property already has tenants, all of the relevant legal requirements should be satisfied, such as health and safety regulations. This will cut down on costs and also reduce risk. However, check this as part of your due diligence, rather than presuming it is the case.
Speaking of cost savings, you will also avoid real estate broker fees. And presuming that the current landlord has maintained the property to a high standard, you won’t need to worry about costly renovations, as the property will be in good condition. But again, confirm this as part of your due diligence.
Given the amount of cost savings offered by this investment strategy, it can be an ideal starting point for real estate investors working on a tight budget, who don’t have the cash flow to cover a few months without tenants.
Buying a House with Tenants Checklist
1. Check Lease Terms Carefully
Although the specifics can vary between states, it’s generally the case that a buyer will not be able to change the terms of the lease agreement until the renewal. Therefore, it is imperative that you check the renewal or end date of the lease, as well as all other terms and clauses, so you understand fully what you’re inheriting from the previous landlord.
Ideally, you want to find a lease that has a renewal date within the next couple of months, or one that is on a month-to-month rolling basis, so you can quickly set up a new lease shortly after purchasing the property.
If you’re considering purchasing a tenanted property with a long lease, then check carefully the terms of the lease and do the math to ensure the rent will provide a sufficient ROI over the duration of the lease.
2. Due Diligence
As the prospective new landlord, it is in your interest to visit the property and ensure everything is in good condition. If the former landlord kept up their end of the deal, the property should be safe to live in. However, if the previous owner failed to maintain the property, you could face legal risks or a costly sum to update the property.
You should also open up a conversation with the tenants in order to forge a good relationship, scope out any red flags and protect your investment. By speaking to the former landlord, you might also be able to access the original lease document and view a tenant file that includes credit checks and references.
Taking out a homeowner or landlord’s insurance policy will provide you with an added layer of protection and keep your investment even safer. These will protect you in the event of any losses, negligence or even tenant injuries.
However, it is also worth noting the difference between the two policies. According to the Insurance Information Institute, the landlord option is about 25% more expensive than a homeowner’s policy. However, it will offer more liability and might cover the loss of rental income if you have to spend time getting a property repaired.
4. Know the Options For Terminating a Lease
If you want to terminate the lease and move the existing tenants out of the property, then you may also have options.
While tenants usually have the legal right to remain in the property for the full lease period, a few termination options might be available. For instance, this would be possible if it is specified in the lease that the former property owner has the right to terminate if they sell.
You could also try and make a “cash for keys” offer. This is where you offer tenants a sum of money in exchange for them agreeing to leave. However, remember your tenant is not obliged to accept your proposal.
Furthermore, if you purchased a property due to foreclosure, there are state rules which dictate when you can issue an eviction notice.
Read our blog on insurance for house flippers to find what policies you’ll need for your next investment property.
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While there are several important things that a prospective landlord needs to take into account, the process of buying a tenant-occupied property boasts a number of benefits.
What’s more, with some thorough research and planning, the process can prove to be far from complicated!
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Ruben is Managing Partner at We Lend LLC. With over a decade in the real estate industry – acquiring, flipping, developing and financing over $500 million worth in real estate – Ruben has quickly become a renowned real estate expert, speaker, and guide for many professionals in the industry. The most successful time...