Each investment property has its own set of risks and rewards, and this is especially true if your property already has rent-paying tenants, allowing you to begin collecting rental income right away.
There are, however, important insights to purchasing a tenant-occupied rental, and every investor should be aware of the drawbacks and advantages of inheriting tenants with their new investment property.
Let’s go over some key points and get good advice on what to look for when buying a house with tenants.
Without further ado let’s jump right into the topic.
Scenario 1: You wish to keep the tenants
This is the most straightforward case, with the least effect on the sale’s timing and terms. If the tenant has a fixed-term or intermittent lease (month-to-month), they will come under your obligation as the new lessor until the sale is completed (a.k.a. landlord). When a fixed-term lease expires in most jurisdictions, it immediately converts to a periodic tenancy.
“Do I need to sign a new lease agreement?” you may wonder. In case you end up deciding to change your agreement with the tenants you need to be attentive towards more details. We’ll discuss those in the upcoming scenarios.
In any case, you can always turn to a real estate agency for help and further assistance.
Scenario 2: The tenant is paying below-market rent
When a tenant has lived in a home for a long time, the rent sometimes falls below market, which sometimes can be the only disadvantage for a buyer who wants to retain a tenant. Property prices, taxes, and mortgage rates increase over time, rising landlords’ overheads and shrinking profit margins.
Most provinces set annual rental increase limits to prevent fraud, with the assumption that if a landlord raises the rent too much, they risk losing a successful tenant. A landlord is required to provide a minimum notice period, and if they have a legitimate reason to raise the rent above the requirements, they must seek approval from their provincial landlord-tenant board.
Note that rent may also be raised above the guideline level if the rise is justified by property improvements or renovations.
What to Expect When Buying a House with Tenants
Before you purchase a tenant-occupied home, you should have a good understanding of what owning these types of properties entails. Here’s a look at a few of the most significant rules you must follow.
Understanding the rights of tenants is important when purchasing a home. You must follow the terms of the pre-existing lease agreement as a new property owner.
When you purchase a rental property with tenants, you also take on some landlord responsibilities. The most basic is to provide a secure and habitable environment for the occupant. Other responsibilities include:
- Keep common areas in good shape.
- Ensure sanitary and heating, ventilation, and air conditioning systems (HVAC) are in good working order.
- Ensure all structural components are in good working order.
- Make sure the tenants have running water and heat.
- Arrange for garbage disposal.
- Take care of any infestation as soon as possible.
Investing in Tenant-Occupied Properties Has Its Benefits
Immediate Rental Income
The fact a rental property with tenants produces immediate rental income is one of the primary benefits of purchasing a rental property with tenants for real estate investment. You won’t have to wait months to find renters, and you could even make a profit after paying your mortgage and other bills.
The Property Meets All the Legal Requisites
This is also another advantage of owning a house with tenants. As you are probably aware, an investment property must meet several requirements before it can be rented out. This includes a number of health and safety standards. Many of these conditions should already be in place if you buy a house with tenants.
Extra investments are not required
The fact no additional investment is required when purchasing a house with tenants is a major selling point. You won’t have to spend any money on renovations because the house is already furnished and leased. For real estate investors on a tight budget, this is perfect.
Buying a house with tenants can be profitable, just like any other form of real estate investment, if you cover all of the requisite bases. This investment will generate good returns and produce positive cash flow if you do your due diligence and ensure that the landlord who listed the tenant-occupied property for sale is following the law.