Purchasing a rental property with current tenants isn’t just convenient—it’s a valuable opportunity. The ability to bypass renovations, advertising, and tenant screening is just one of many benefits. However, it’s essential to be aware that purchasing a property with tenants in place can present some 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.
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. Most of the time, it’s important to know which existing agreements will govern your new investment.
Assess tenant payment history and lease terms
Along with examining the lease documents, it’s vital to screen the current tenants carefully before buying the property. Approach the situation as if the tenants were applying for the first time, by conducting full background and credit checks, and confirming their payment history and references.
Also, check with the current landlord or owner to ensure that the tenant’s security deposit has been paid and is held in a separate account.
Inspecting the property with tenants in place
In addition to screening the tenants, it’s vital to conduct a detailed inspection of the property itself. 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. 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 property comes with tenants, you must be ready to keep it in habitable condition, check that the electrical and plumbing systems are safe and functional, and ensure the building is structurally sound. 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 Tri-State Area. For more information about our property management services in Queen Village and nearby, contact us today or at 610-497-2700.
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