Purchasing a rental home with current tenants is more than just convenient; it’s a great investment opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. However, buying a property with existing tenants also comes with a few challenges that should be considered. To make the most of this opportunity, you’ll need to learn about the process and what challenges to avoid.
Conducting Due Diligence
The instant income and convenience of buying a leased property might make it seem like the ideal option for your next investment. However, you shouldn’t assume that a leased property is well-maintained or that tenants are punctual with rent payments. Rather, take the time to perform due diligence and ensure the leased property is a worthwhile investment.
The existing lease agreement should be one of the first things you review when considering a leased property. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous landlord.
Since the lease is a binding contract, you must be prepared to follow its terms until it expires or is up for renewal. In rare cases, the tenant may agree to terminate their lease after the sale, but this is not the norm. Typically, you’ll need to be aware of any prior agreements that govern your new investment.
Assess tenant payment history and lease terms
In addition to reviewing the existing lease, it’s crucial to carefully screen the current tenants before acquiring the property. Treat this screening as if the tenants were first-time applicants, performing background checks, credit checks, and confirming their payment history and references.
Additionally, confirm with the current owner or landlord that the tenant’s security deposit has been paid and is kept in a separate bank account.
Inspecting the property with tenants in place
In addition to tenant screening, you must also conduct a complete evaluation of the property. To fully understand the property’s condition, it’s important to inspect both the house and the yard in person.
With tenants already residing in the home, it’s crucial to be cautious and understand how responsible they are with upkeep and cleanliness. Additionally, be sure to ask the current owner about any past or present insurance claims, especially if they resulted from tenant-related issues. Too many prior insurance claims might cause difficulty in getting insurance coverage for the property after the purchase.
If everything looks good, you might have discovered a great rental property with tenants in place. Whether or not your new rental property has tenants, you’ll need to keep it in habitable condition, verify that the electrical and plumbing systems are safe, and ensure the structures are sound. Even if tenants are in place when you buy the property, once the sale is done, you are responsible for managing and maintaining it.
Managing a property can be quite demanding, particularly if you handle everything yourself. Why not let the experts at Real Property Management Lakeview handle your daily property management tasks? For more information about our property management services in Denton and nearby, contact us today or at 940-323-0505.
Originally Published on March 12, 2021
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