Acquiring a rental property with tenants in place is not only convenient but also a promising opportunity. Skipping renovations, advertising, and tenant screening is just the start of the advantages. However, it’s important to realize that buying a property with current tenants also brings its own set of challenges. Navigating this unique opportunity successfully requires learning about the process and understanding potential pitfalls.
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, don’t assume that a leased property is in good condition or that the tenants are reliable and pay rent on time. Instead, make sure to do your due diligence to verify that the leased property is a sound investment.
The first thing to examine when considering a leased property is the current lease agreement. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous landlord.
Given that the lease is binding, you’ll need to follow its terms until it concludes or is due for renewal. In some cases, the tenant agrees to end the lease upon the sale of the property, but this is rare. Typically, you’ll need to be aware of any prior agreements that govern your new 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. Handle the process as if the tenants were applying anew—run detailed background and credit checks, and verify 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 gain a clear understanding of the property’s condition, you’ll need to see the house and yard in person.
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. Don’t forget to ask the current owner about any past or present insurance claims, particularly if they were caused by the tenants. 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. While your new rental may come with tenants, once the sale is finalized, the responsibility for managing and maintaining the property is fully yours.
Managing a property requires a lot of work, especially if you’re doing it on your own. Why not leave the day-to-day property management to the professionals at Real Property Management Three Bridges? For more information about our property management services in St. Charles and nearby, contact us today or at 636-542-8852.
Originally Published on March 12, 2021
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
