Acquiring a rental property with existing tenants is not only a convenient choice, but also a great opportunity. The ability to bypass renovations, advertising, and tenant screening is just one of many benefits. That said, it’s vital to understand that purchasing a property with tenants already living there comes with its own challenges. Navigating this unique opportunity successfully requires learning about the process and understanding potential pitfalls.
Conducting Due Diligence
The quick cash flow and turnkey setup of buying a leased property may appear to be an attractive choice for your next investment. However, don’t automatically assume that a leased property is in good shape or that the tenants are responsible and pay rent promptly. Instead, conduct thorough due diligence to confirm that the leased property is a solid investment.
When evaluating a leased property, the current lease agreement is among the first things you should inspect. When you purchase a property with tenants, you take over the lease agreement they signed with their previous landlord.
Because the lease is a legal contract, you’ll need to accept its terms until the lease expires or can be renewed. In some cases, the tenant agrees to end the lease upon the sale of the property, but this is rare. Usually, you’ll need to be familiar with the previous agreements that will govern your new investment.
Assess tenant payment history and lease terms
Besides reviewing the lease agreements, it’s important to conduct a thorough screening of the current tenants before buying the property. Handle the process as if the tenants were applying anew—run detailed background and credit checks, and verify their payment history and references.
Verify with the current landlord or owner that the security deposit has been paid by the tenant and is stored in a separate bank account.
Inspecting the property with tenants in place
Besides screening your tenants, it’s important to perform a comprehensive evaluation of the property. To get an accurate sense of the property’s condition, you’ll need to personally inspect both the house and the yard.
With tenants already occupying the property, it’s essential to be careful and evaluate how well they maintain the home and yard. Make sure to inquire with the current owner about any past or current insurance claims, especially those related to tenant damage. A high number of insurance claims could make it difficult to insure the property after the sale.
If everything checks out, you may have found a great rental property that already has tenants. Regardless of whether your new property has tenants, you’ll need to maintain it in livable condition, make sure the electrical and plumbing systems are in working order, and confirm the structural integrity of the building. Though your new rental property may come with tenants, once the sale is finalized, you take full responsibility for managing and maintaining it.
Property management can be complex and time-consuming, especially if you’re doing it yourself. Consider outsourcing the daily management tasks to the professionals at Real Property Management Results. For more information about our property management services in Evansville and nearby, contact us today or at 812-461-1676.
Originally Published on March 12, 2021
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