Purchasing a rental property with current tenants isn’t just convenient—it’s a valuable opportunity. Skipping renovations, advertising, and tenant screening is just the start of the advantages. That said, it’s vital to understand that purchasing a property with tenants already living there comes with its own challenges. To make the most of this opportunity, you’ll need to learn about the process and what challenges to avoid.
Conducting Due Diligence
The immediate cash flow and turnkey nature of acquiring a leased property can make it seem like a great choice for your next investment. However, you shouldn’t assume that a leased property is well-maintained or that tenants are punctual with rent payments. Empower yourself by doing proper due diligence to make sure the leased property is a smart investment.
When evaluating a leased property, the current lease agreement is among the first things you should inspect. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous landlord.
Because the lease is a legal contract, you’ll need to accept its terms until the lease expires or can be renewed. Sometimes, the tenant agrees to end the lease when the property is sold, though this isn’t common. Most often, it’s crucial to understand the existing agreements that will 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. Handle the process as if the tenants were applying anew—run detailed background and credit checks, and verify their payment history and references.
Make sure to verify with the current owner or landlord that the tenant’s security deposit has been paid and is held 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. For a complete view of the property’s current condition, you should personally inspect the house and yard.
Since tenants are already occupying the property, it’s important to be cautious and find out how diligent they are in keeping it clean and well-maintained. Additionally, be sure to ask the current owner about any past or present insurance claims, especially if they resulted from tenant-related issues. Excessive insurance claims may complicate getting insurance for the property once it’s sold.
If everything looks good, you might have discovered a great rental property with tenants in place. Whether your new investment includes tenants or not, you’ll need to ensure the property is habitable, with properly working electrical and plumbing systems, and structurally safe buildings. Even if tenants are in place when you buy the property, once the sale is done, you are responsible for managing and maintaining it.
Property management can be complex and time-consuming, especially if you’re doing it yourself. Why not leave the day-to-day property management to the professionals at Real Property Management Trailhead? For more information about our property management services in Fort Worth and nearby, contact us today or at 817-930-1160.
Originally Published on March 12, 2021
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