Acquiring a rental property with existing tenants is not only a convenient choice, but also a great opportunity. Skipping the renovation, advertising, and tenant screening process is just one of the perks. But it’s crucial to recognize that acquiring a rental property with existing tenants can also come with certain challenges. To take full advantage of this opportunity, it’s important to educate yourself about the process and potential pitfalls.
Conducting Due Diligence
With its instant cash flow and ready-made setup, buying a leased property can look like a promising 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. Rather than assuming, conduct careful due diligence to ensure that the leased property is a good investment.
One of the first things to review when evaluating a leased property is the current lease agreement. When buying a tenant-occupied property, you inherit the lease the tenants signed with their former landlord.
As the lease is legally binding, you’ll need to be comfortable adhering to its terms until it ends or is up for renewal. There are instances when the tenant has agreed to end the lease once the property is sold, but this is not typical. Most of the time, it’s important to know which existing agreements will govern your new investment.
Assess tenant payment history and lease terms
In addition to reviewing the existing lease, it’s crucial to carefully screen the current tenants before acquiring the property. Treat the screening as if the tenants were new applicants by running background and credit checks, and verifying their payment history and references.
Verify with the current landlord or owner that the security deposit has been paid by the tenant and is stored in a separate bank account.
Inspecting the property with tenants in place
In addition to screening the tenants, it’s vital to conduct a detailed inspection of the property itself. To properly assess the current condition of the property, an in-person inspection of the house and yard is necessary.
Given that tenants are living on the property, you should be cautious and determine how attentive they are to cleanliness and maintenance. Additionally, be sure to ask the current owner about any past or present insurance claims, especially if they resulted from tenant-related issues. Multiple insurance claims could make it harder to secure insurance on the property after the sale.
If all the details are in order, you could have found an ideal tenant-occupied rental property. Regardless of whether your new property has tenants, you’ll need to maintain it in livable condition, make sure the electrical and plumbing systems are in working order, and confirm the structural integrity of the building. Even if the property has tenants when you buy it, you are fully responsible for managing and maintaining it as soon as the sale is completed.
Managing a property can become overwhelming, particularly if you’re handling it all by yourself. Why not let the experts at Real Property Management Tri-Cities handle your daily property management tasks? For more information about our property management services in West Richland and nearby, contact us today or at 509-572-5440.
Originally Published on March 12, 2021
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