When property managers are just starting out, the thought of buying buildings that already have tenants in them can be enticing. There’s an existing revenue stream in place, and they won’t have to spend as much time trying to fill vacancies when they’re just opening for business.
Despite these benefits, buying a commercial property with existing tenants is not without its challenges. Knowing about those challenges and how to overcome them can spell the difference between success and failure.
If you’re considering buying a property with tenants, you’ve come to the right place. Keep reading to learn about five crucial tips to keep in mind to ensure your purchase helps you achieve your business objectives.
1. Understand the legal implications.
When you buy a commercial property with existing tenants, you might think you can kick everyone out once the deal closes, but you would be wrong. Leases remain in effect despite any real estate transactions unless there are clauses in the original contracts to the contrary.
In most cases, as a new owner of a commercial building, you will have to honor the existing leases you inherit. So before signing a contract, be aware of all the tenants that come with the property. You should also familiarize yourself with potential ways to get tenants to leave—like offering to pay them if they agree to move out.
2. Look for month-to-month leases.
If the existing tenants have month-to-month leases, property owners generally have more flexibility when making them vacate the premises or—better yet—agree to stay, lock into a longer-term lease, and pay more for rent. Before asking tenants to vacate, you need to be aware of any laws and regulations that govern your property.
In most cases, you will have to give tenants advance notice so they can find a new place to live. The same holds true for tenants that may be interested in signing a longer-term lease—you have to give them fair warning before forcing them to make a decision.
3. Talk about security deposits.
After buying a new property, the last thing you want is to discover that you owe existing tenants their security deposits—which the previous owner has stocked away in their own bank account. Building ownership might have changed hands, but tenants are still legally due their security deposits when they move out (assuming the place is in great condition).
As you begin negotiating with the property owner, discuss this topic. You can either get the owner to agree to cover all security deposit expenses for existing tenants or get them to lower the sales price and take over those obligations yourself.
4. Make a good first impression.
The deal is closed, and you’ve added a nice piece of property to your portfolio. That’s great news! But your work is just getting started. Now, it’s time to direct your attention to your tenants and impress them right out of the gate. Start building rapport as soon as you can. An easy way to do this is by sending a letter to all tenants introducing yourself, letting them know what they can expect from you as an owner, and asking for any feedback or questions they might have.
In addition to trying to impress tenants, you’ll also want to look internally and see whether you can improve operations and become more efficient. This is an area in which purpose-built property management software can be particularly beneficial. With the right solution, you can expedite maintenance requests and repairs while facilitating electronic payments.
5. Cover your bases.
In the ideal world, buying a property with existing tenants would be a relatively smooth, straightforward experience. And that may be what you experience! However, not every new landlord will have a seamless transition. For example, an existing tenant might claim they paid a much larger security deposit than they actually did. They may also try to deceive you into thinking they own the new refrigerator in their unit.
To avoid running into any of these headaches, make all tenants and the selling owner sign a tenant estoppel certificate, which outlines who owns what, how big of a security deposit each tenant paid, and more.
Buying a property with existing tenants? Netintegrity can help!
Adding a property with existing tenants to your portfolio is a great way to generate immediate cash flow and ROI. However, it’s not without its challenges.
Keeping these tips in mind as you search for a new property can help you avoid entering agreements that ultimately cause your business more harm than good.
Want to learn more about how Netintegrity can help growing property management businesses operate more efficiently, increase margins, and bolster the tenant experience? Request a consultation today.