Purchasing a rental property can be a terrific investment. Especially one that already has a demonstrated history of maintaining steady occupancy. Before taking the plunge into this investment area, it is important to not assume the property is vacant. Acquiring an investment property with already established tenants has its pros and cons, here is what you should consider.
Pros of Buying an Occupied Rental Property
Inherit a Turnkey Property
Since the property is already housing tenants, there is an extremely high chance it’s in good condition and should already meet local regulations, health and safety standards, and zoning codes. This means little work for you to do. However, it is a smart strategy to hire a home inspector just in case the previous landlord or owner skirted rules. You do not want to inherit any legal headaches.
Gain an Instant Cash Flow
Owning an already occupied property means instant cash flow. Most new property owners will be faced with immediate mortgage payments, and steady passive income rolling in can help offset this expense. You will not need to scramble to find tenants to gain your revenue stream.
Needed Repairs Done by Seller
During the purchase negotiation, like any other property, buyers have the right to ask for certain repairs to be completed before signing an agreement. This means any necessary repairs are done at the seller’s expense, not yours.
Can Save Money for Future Renovations
Living space should theoretically be in good shape since there are established tenants. However, like any other property, wear and tear will occur. You are likely not going to want to do any major renovations while the space is occupied, but since you do not have to invest in finding tenants, you can focus on planning and saving for upgrades that yield a good ROI. This way, in the future you can market and rent the property at a higher price after you have made improvements.
Cons of Buying an Occupied Rental Property
Must Keep Existing Lease Terms
As a new landlord, you cannot just come in and raise rents, nor can you modify the existing agreement regarding pets or other policies. You must wait until the existing tenants' leases are up before you can set renewal rental terms. Additionally, if you inherit undesirable tenants, you’re stuck with them until their lease is up (unless you have legal grounds to evict them).
Cannot Conduct Tenant Screenings
Established tenants have already been screened by the previous owner or property manager, and you will have to rely upon their screening. Before you can begin to conduct your own screenings, you will have to wait until leases expire. In the meantime, what you can do is obtain as many details as possible to determine how the previous screenings were conducted. Which leads to…
Might Gain ‘Problem’ Tenants
Most tenants are good ones who will pay rent on time and treat your property like their own. Unfortunately, with already established tenants, you do run the risk of having a problem tenant. They might not pay rent, destroy the property, or disturb other tenants and neighbors.
Risk of Inheriting Major Flaws
Every new owner runs the risk of the previous owner not maintaining the property up to code. If it turns out this is the case, you might be in for expensive improvements or must face legal battles.
Do Your Due Diligence
If you plan to buy home with tenants as an investment property, be sure to do your due diligence by:
- Reviewing current lease agreements and ensure they meet all local tenant laws.
- Ask the seller questions about their tenants and for proof of payment history.
- Inspect the property to see how the tenants treat it.
- Verify security deposits and make sure they appear on the settlement statement.
Committing to a pre-existing lease agreement comes with its pros and cons. However, if you go over details carefully, consulting with an attorney, and learn everything you can before you buy a rental with tenants in place, this will help you decide if the investment is a good one.