Purchasing a rental home with current tenants is more than just convenient; it’s a great investment opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. However, it’s essential to be aware that purchasing a property with tenants in place can present some challenges. To navigate this opportunity well, it’s crucial to understand the process and avoid common challenges.
Conducting Due Diligence
The immediate cash flow and ready-to-go nature of purchasing a leased property can make it seem like an appealing option for your next investment. However, it’s crucial not to assume that just because a property is leased, it’s in good condition or the tenants are responsible and pay 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 you purchase a property with tenants, you take over the lease agreement they signed with their previous landlord.
Because the lease is a legal contract, you’ll need to accept its terms until the lease expires or can be renewed. In rare cases, the tenant may agree to terminate their lease after the sale, but this is not the norm. 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 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.
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.
Given that tenants are living on the property, you should be cautious and determine how attentive they are to cleanliness and maintenance. Make sure to inquire with the current owner about any past or current insurance claims, especially those related to tenant damage. Multiple insurance claims could make it harder to secure insurance on the property after the sale.
If all goes well, you could have found a great tenant-occupied rental property. 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.
Property management can be a time-consuming task, especially when managing it on your own. Consider outsourcing the daily management tasks to the professionals at Real Property Management Experts. For more information about our property management services in Huntersville and nearby, contact us today or at 704-220-0110.
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