Purchasing a rental home with current tenants is more than just convenient; it’s a great investment 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 instant income and convenience of buying a leased property might make it seem like the ideal option for your next investment. It’s important not to assume that a leased property is well-maintained or that the tenants are responsible and pay rent on time. Rather than assuming, conduct careful due diligence to ensure that the leased property is a good investment.
One of the first things to review when evaluating a leased property is the current lease agreement. When you acquire a property with tenants, you automatically take on the lease agreement they had with the former landlord.
Because the lease is a legal contract, you’ll need to accept its terms until the lease expires or can be renewed. There are instances when the tenant has agreed to end the lease once the property is sold, but this is not typical. In most cases, it’s essential to understand what prior agreements will govern your investment.
Assess tenant payment history and lease terms
Aside from going over the existing lease documents, you should thoroughly screen the current tenants before purchasing the property. Approach the screening as if the tenants were new applicants by performing thorough background and credit checks, and verifying 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
Along with screening tenants, it’s necessary to carry out a full inspection of the property. To properly assess the current condition of the property, an in-person inspection of the house and yard is necessary.
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. Too many prior insurance claims might cause difficulty in getting insurance coverage for the property after the purchase.
If everything checks out, you may have found a great rental property that already has tenants. 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.
Property management can be complex and time-consuming, especially if you’re doing it yourself. Why not let the experts at Real Property Management All Connect handle your daily property management tasks? For more information about our property management services in Austin and nearby, contact us today or at 512-806-0606.
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