Landlord’s Guide to Buying Tenant-Occupied Properties

Posted by Hannah Lapin on May 11, 2020 9:00:00 AM

brick and tan house with a lawn

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 proceeding with caution. Here are some considerations to help you determine if buying a tenant-occupied rental is the right move for you, as well as the due diligence needed to move forward.

Pros & Cons of Buying Tenant-Occupied Rentals

In addition to the seamless transition of leases from one real estate investor to the next, some of the pros of buying tenant-occupied properties include:

  • Saving time and money by not looking for a new tenant. Mesa Property Management says it is not uncommon for it to take six weeks or longer to find and screen a new tenant. Every month vacant, investors must cover the utilities and mortgage without any income. Further, you can save money on marketing your property. The Balance found that landlords often pay between $50 and several hundred dollars on advertisements, or one month of rent (or more) on a realtor.
  • Gaining immediate rental income. As soon as the purchase of the home goes through, you will take over the lease, and therefore, the rental income.
  • Avoiding any in-between tenant tasks and expenses. In between tenants, it is recommended that you clean all the carpets, windows, walls, etc. as well as replace the locks, air filters, and any batteries. You should also paint, check the landscaping, and make sure all lights, outlets, water faucets, and appliances are in working order. With tenants already in place, you can manage move-outs at a later date. Further, Buttonwood Residential Property Management said the cost of a single move out, i.e. tenant turnover, is typically over $1,000.

On the other hand, there are also some drawbacks that include:

  • Landlords have to honor the terms of the lease even if they do not like them. According to NOLO, in the event of a change in landlord, most U.S. jurisdictions give tenants the right to remain on the property and keep the terms of their original lease until the lease ends. It is essential to review all lease terms before purchasing the property.
  • You could inherit “problem tenants.” One way to avoid this is to review the tenant payment history and credit reports prior to purchasing the property. This will reduce the chances of you being left with a tenant that causes problems and headaches for you.
  • If you need to evict a tenant, it can be difficult and costly. BiggerPockets found that the total costs of a formal eviction can be between $4,000 and $7,000, depending on where you live, the type of rental, and how long the process takes. Again, it is extremely important to do your due diligence before inheriting tenants.

Other Considerations & Tips for Buying a Tenant-Occupied Rental

If you have decided to purchase a tenant-occupied rental, here are some steps you can take to mitigate those drawbacks and ensure a safe investment:

Pre-screen the property, the lease, & the tenants thoroughly

Make sure you see the property before purchasing, 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 a rental’s cash flow here.

Ask 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.

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.

Where to Buy a Tenant-Occupied Rental

Sometimes, you can find local listings that come with tenants. However, it is much easier to go through a designated platform, such as Roofstock Marketplace, to find highly-vetted investment properties.

Roofstock Marketplace is an online marketplace for buyers and sellers of investment properties. All Roofstock listings must pass a proprietary rental certification process in order to be placed on the site. To evaluate each rental property, the platform looks at:

  • Property inspection conducted by experienced professionals
  • Property valuation
  • Rental market analysis
  • Estimates of costs of repairs
  • Preliminary title reports
  • Home disclosure reports

Roofstock offers nationwide listings with pictures, floor plans, and 3D-tours, making it easy to invest in any rental property from the comfort of your couch.

Finance Your Rentals with the Nation’s Leader in Rental Loans

Visio Lending is a leading provider of 30-year financing to investors in single-family (1-4 unit) residential rental properties, including vacation rentals. Visio underwrites its flagship product, the Rental360, based on property level cash flow and borrower credit, rather than the borrower’s personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of rental properties. We are proud to offer investors:

  • Full 30-year terms, no balloons
  • Rate and PPP buy downs
  • The ability to finance through an LLC

 

Contact Us to Grow Your Rental Portfolio

 

Related: Forbearance vs. Deferrals,  Rent Forbearance Programs- Develop a Plan

Topics: Landlording

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