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 finding tenants, including 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
Buying a house with tenants has a lot of moving pieces and some very gray areas. Here are some of the benefits and drawbacks to consider.
Pros of Tenant Occupied Property
In addition to the seamless transition of existing leases from one real estate investor to the next, some of the pros of buying tenant-occupied properties include:
Save Time and Money By Not Looking for New Tenants
Mesa Property Management says it is not uncommon for it to take six weeks or longer to find and screen new tenants. 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 and processing applications, or one month of rent (or more) on a real estate agent.
Gain Immediate Rental Income
As soon as the purchase of the home goes through, the new owner will take over the lease, and therefore, the current tenants start directing rent payments to you.
Avoid 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.
Cons of Tenant Occupied Property
On the other hand, there are also some drawbacks to purchasing a tenant occupied home 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. Keep in mind that local landlord tenant laws vary, so therefore iIt is essential to review all state and local laws as well as lease terms before purchasing the property.
You could inherit “problem tenants."
A property owner might be inclined to sell a tenant-occupied home if the tenants cause problems, such as not paying rent. One way to avoid this is to review the tenant payment history and credit reports prior to purchasing the property. Ask for rent payment receipts as well. 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 Home
If you have decided to purchase a tenant-occupied property, here are some steps you can take to mitigate those drawbacks and ensure a safe investment:
Pre-screen the property, the current leases, & the existing 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 current 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, meets any legal requirements.
Run the numbers
Double-check that the rental income 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 a DSCR calculator to help you determine profitability.
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 when the tenant moves out. 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.
Create a seamless transfer of the lease agreement
For existing tenants, working with a new landlord or new property manager can be stressful. Make this process easier for both yourself and the tenants by writing a landlord introduction letter. Be sure to explain all details of what will be the same and different from the previous landlord.
Have a clear understanding of landlord tenant laws
This particularly applies if you buy an investment property in a new city. Local laws vary greatly by location. A great way to get ahead of this is to work with real estate attorneys or local property management companies to be sure you meet legal requirements of all local and state laws.
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. New landlords are immediately liable when the property closes.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.
If you have fully researched the option and decided you would like to buy a house with tenants, here is where to look. 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 with existing tenants.
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
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