Buying a tenant-occupied rental could be extremely beneficial to real estate investors, especially if the property has high-quality tenants. This will save you money on marketing and tenant screening, which can really add up. Plus, it will set you up for immediate rental income. However, we advise you to proceed with caution. Here are some considerations to help you with due diligence when purchasing a tenant-occupied rental.
Keep in mind that, although you may purchase the property, the lease that the tenants signed is a legal contract. Just because ownership of the property changed hands doesn’t mean that the signed agreement is affected, as it is linked to the property, not the owner. This means you can’t change things like rent or clauses or kick a tenant out before the lease is up.
Pre-screen the property, the lease, & the tenants thoroughly
Make sure you see the property before purchasing it to get an idea of how well the tenants take care of the property. Once you’ve done this, ask the owner for payment receipts and tenant credit reports to see their rent-paying abilities. Also, be sure to get a history of complaints and maintenance requests. Finally, dive into the rental agreement to make sure it is sound and, most importantly, compliant.
Run the numbers
Double-check that the rent payment will be greater than the mortgage and expenses so that you will have positive monthly cash flow from the property. This can be a complicated process, so we have more in-depth information on calculating and predicting rental cash flow here.
Ask the owner for the security deposit & documentation on any other agreements
The security deposit is important because if you don’t have it, you could end up having to front the money yourself at the end of the lease. Ensure that the closing statement transfers both the record and money of security deposits to avoid this. Having documentation of any other agreements that the tenant and owner have entered could also save you from a lawsuit or issue you didn’t even know about.
Make sure you have the proper insurance coverage needed as a landlord
If you end up taking over a lease, you are going to need a landlord insurance policy that has added liability coverage. You don’t want to have to pay or risk being sued for damages or injury on the property, so landlord insurance is crucial for any rental property you purchase. For more information on the different types of policies, pitfalls to avoid, and much more, check out our Full Guide to Landlord Insurance & Liability Coverage.
For guidance on how to sell a tenant-occupied rental, see Creative Ways to Sell a Tenant-Occupied Rental.