Purchasing a property that already has rent-paying tenants can be a lucrative investment. That said, it can also be a complicated and challenging process. If you’re considering the addition of a property to your portfolio that would include inherited tenants, there are a few important things you should know before moving forward. Our experts weigh in below.
Understand that existing leases are still legally binding.
Leases do not dissipate with the sale of a property. Barring any specific clauses contained within, leases are actually tied to the property and remain legally binding after the sale and transfer of ownership are complete. What this means is that you, as the new owner, will be required to abide by the agreement that was made between the tenant(s) and the previous owner. As such, it’s imperative that you know exactly what you’re getting into when purchasing a property with existing tenants.
If you’d like to start fresh, there are some ways to get around this roadblock. For instance, you might offer the current tenants a “cash for keys” arrangement, through which you offer to pay them a financial settlement in exchange for them terminating the lease and vacating. Just keep in mind that tenants are under no obligation to accept these types of offers, and they have the legal right to live out their lease term, so be prepared.
Month-to-month tenancies offer much more flexibility.
If the tenants residing in the property you are considering are living there under a month-to-month tenancy, you’ll have a lot more leeway in terms of whether you let them stay, and if so, whether you’d like to make certain changes to the terms of their tenancy. If you’d like the existing residents to vacate, you must provide them with notice that abides by the term of the lease and is compliant with the laws and regulations in your area.
If you’d like them to remain but would prefer to adjust the terms of their tenancy, such as increasing the rent or asking them to commit to a long-term lease agreement, you can do so legally, provided you give ample notice and get them to agree to the new arrangement in writing.
Don’t forget about security deposits.
Before you officially purchase the property, make sure that you go over any outstanding obligations that you will also be acquiring as a result of the sale. In particular, any security deposits that were paid to the seller. Tenants are eligible to receive the return of their deposit, regardless of who owns the property at the time that they vacate.
There are a few options available to you in regards to security deposits. You can make an agreement that the seller covers the costs of any outstanding deposits prior to transferring the property. Or, you can reach an agreement to take on this obligation in exchange for some other benefit, such as lowering the selling price or whatever arrangement you’d prefer to make.
Start off on the right foot.
Once you’ve ironed out all the details and are ready to move forward with the purchase of a renter-occupied property, it’s a wise idea to start building a rapport with tenants as quickly as possible. We strongly recommend sending out a letter to each resident, introducing yourself as the new landlord, letting them know what to expect during the transition and making yourself available for any questions or concerns.
This is also a good time to lay the groundwork for other logistical items, such as when and how rent will be collected, how maintenance request should be submitted, and anything else you feel would be important and helpful for them to know.
Lastly, make sure that you take steps to protect yourself.
Unfortunately, not everyone is honest and trustworthy. Investors who purchase tenant-occupied properties often find themselves embroiled in a “he said, she said” situation, where a tenant provides false information for their own benefit. For instance, it’s not unusual for a vacating tenant to claim he or she paid a larger security deposit than what’s on record, or that a particular appliance within their unit belongs to them vs. came with the rental.
To avoid any of these legal conundrums, a Tenant Estoppel Agreement is strongly advised. An estoppel is basically a signed statement that certifies that certain facts are correct and accurate. By requiring this type of agreement signed by both the current tenants and the selling owner, you can prevent later claims of differing facts.
Buying a rental property that is already occupied can be a great opportunity for investors to generate immediate cash flow and ROI. Before pulling the trigger, however, you should be mindful of the tips above. This will protect you, your investment and your future returns and ensure a much smoother, uneventful transfer of ownership for everyone involved.