Buying a property with existing tenants can be a mixed bag.
Ideally, when you purchase a rental property, you’ll inherit dream tenants who pay rent on time, care for your rental, and fly under the radar. But in another scenario, you might inherit difficult tenants who pay rent late, neglect your property, and stir up drama with the neighbors.
Renters aside, plenty of other factors may influence your buying decision, like navigating pre-existing lease agreements, planning maintenance and repairs, and inspecting an occupied property with a tenant’s belongings in place.
Knowing what to expect before buying a property with existing tenants can go a long way toward deciding whether or not to sign on the dotted line. In this article, we’ll discuss the pros and cons of inheriting tenants, help you understand your rights and responsibilities as a landlord, and share some actionable tips to make any potential transition go as smoothly as possible.
Pros and Cons of Buying a Property with Existing Tenants
Purchasing a property with existing tenants might prove highly advantageous to incoming landlords. Check out a few of the upsides below.
Benefits
- Existing tenants provide an immediate return on investment: A property with rent-paying tenants and an active lease will provide immediate cash flow, resulting in zero downtime between purchasing and generating rental income.
- Existing tenants prove the property is rentable: A common worry among buyers is that their rental property might sit vacant, leading to lost income. On the flip side, existing tenants prove that a property is rentable, and their presence demonstrates how much renters are willing to pay to live there.
- Potentially lower purchase price: Existing tenants may make the home less desirable and more challenging to inspect for certain types of buyers, perhaps opening the door to negotiate a lower purchase price.
- The right tenants make renting easy: If a landlord inherits upstanding tenants, they may be able to put the rental process on autopilot. The ideal situation is where landlords communicate amicably with renters, collect rent on time, re-up with desirable tenants, and generate “set it and forget it” passive income.
Though purchasing a property with existing tenants has advantages, there are a few downsides.
Challenges
- New landlords cannot screen inherited tenants: Landlords can’t choose their inherited tenants, so they must accept whoever they inherit, meaning no credit or background checks, reference checking, or comparing tenants against other applicants.
- New landlords must abide by a lease they didn’t create: Existing tenants are locked into the property through a lease agreement that potential buyers didn’t write. New landlords must play by the previous landlord’s rules, for better or worse. Remember, the lease will eventually expire, but you can create a new one with your rules in place.
- Pre-purchase inspections are more complicated with tenants: A property full of furniture, artwork, pets, plants, etc., is more difficult to inspect than an empty one. Potential buyers must properly inspect properties while simultaneously respecting the current tenants’ privacy. No renter wants their belongings touched or moved by a stranger.
- Improvements and repairs often must be delayed: If a buyer is itching to make significant repairs or improvements to their newly purchased property, they’ll likely need to wait until the tenant’s lease agreement expires and the property is vacant.
Understanding Your Rights and Responsibilities
As a new landlord, you must abide by state-specific landlord-tenant laws and understand your obligations to existing tenants before purchasing a property.
Lease Agreements: What Happens After the Purchase?
Generally, any active rental agreements will remain valid after a transfer of ownership, even once a new owner takes over as the landlord. Tenants have many rights that protect them for the duration of their lease agreement (which is tied to the property, not the owner).
Should a new property owner wish to remove existing tenants before their lease is up, they must first demonstrate just cause and follow their state’s eviction protocols. Simply breaking a lease and forcing a tenant to leave without a valid reason is technically an option, but doing so is against the law. It could subject property owners to legal action from the tenant. We don’t recommend this tactic.
In some cases, an existing lease may include a clause allowing the owner to void the rental agreement if they decide to sell the property. In such a situation, potential buyers who don’t want to inherit tenants could make their offer contingent on the current owner exercising this clause, voiding the rental contract, and (legally) forcing the tenants to leave before the closing date.
Know Your Landlord-Tenant Laws
Certain rules and protections apply for the life of a rental agreement, so new property owners should refer to their state’s landlord-tenant laws to address any questions about habitability standards, rent payments, access to rental units, lease modification, and other relevant housing topics.
Understanding a state’s regulations will help landlords navigate inherited leases and apply their terms to tenants in accordance with local laws.
What To Do Before Buying a Property with Tenants
To ensure proper due diligence, let’s highlight a few steps that incoming property owners should take before purchasing a property with existing tenants.
Review the Current Lease Agreements
Read existing lease agreements thoroughly before purchasing a property with tenants; you must honor the agreement if you follow through with the purchase. If any part of a lease is confusing, cross-check it with a trusted legal source or ask the current landlord for written clarification.
Assess the Property’s Condition
As a potential buyer, you’ll likely schedule a pre-purchase inspection before closing. We also recommend surveying the property with the landlord to document any damage the current tenants may have caused during their lease. Once their lease is up, you might be able to use their security deposit to pay for any repairs.
Reference the Tenant’s Payment History
Contact the current landlord and ask them for access to the tenant’s past rental payment receipts. In an ideal scenario, you’ll find no instances of late or missed rent payments. Tenants who pay rent late, however, might raise a red flag for the buyer or could help them negotiate a lower price for the property.
Tips for a Smooth Transition
If you decide to purchase a property with existing tenants, here are a few tips to ensure the transition is as seamless as possible.
Communicate Throughout the Entire Transition
Getting on the same page with the old landlords and future tenants encourages an ideal transition. Here’s how we recommend doing so:
- Ask the seller to introduce you to the inherited tenant(s).
- Exchange contact info with new renters and discuss preferred methods of contact.
- Discuss the existing lease terms and how you’ll process rent payments.
- Give renters plenty of advanced notice if you don’t plan on renewing their lease.
Respect Existing Lease Agreements
As mentioned earlier, landlords must abide by existing lease agreements, even if they disagree with them. If you don’t like an inherited rental contract, remain patient and implement a new agreement once the current one expires.
How TurboTenant Can Help
If you’re considering buying a property with existing tenants, our innovative software can help you navigate the process by:
- Digitizing rental applications to help quickly replace old tenants with new ones.
- Screening future tenants to help fill future vacancies with well-qualified renters.
- Generating lease agreements to set clear expectations between you and your tenants.
- Handling maintenance requests so you don’t have to.
- Collecting rent payments and automatically generating digital receipts.
Sign up for TurboTenant today to see how our free software can streamline your property management experience.
