Purchasing a rental home with current tenants is more than just convenient; it’s a great investment opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. However, it’s important to realize that buying a property with current tenants also brings its own set of challenges. Navigating this unique opportunity successfully requires learning about the process and understanding potential pitfalls.
Conducting Due Diligence
The quick cash flow and turnkey setup of buying a leased property may appear to be an attractive choice for your next investment. However, don’t assume that a leased property is in good condition or that the tenants are reliable and pay rent on time. Rather, take the time to perform due diligence and ensure the leased property is a worthwhile investment.
One of the first things to review when evaluating a leased property is the current lease agreement. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous 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. In some cases, the tenant agrees to end the lease upon the sale of the property, but this is rare. Typically, you’ll need to be aware of any prior agreements that govern your new investment.
Assess tenant payment history and lease terms
Aside from going over the existing lease documents, you should thoroughly screen the current tenants before purchasing the property. Handle the process as if the tenants were applying anew—run detailed background and credit checks, and verify their payment history and references.
Additionally, confirm with the current owner or landlord that the tenant’s security deposit has been paid and is kept in a separate bank account.
Inspecting the property with tenants in place
In addition to tenant screening, you must also conduct a complete evaluation of the property. To gain a clear understanding of the property’s condition, you’ll need to see the house and yard in person.
With tenants already occupying the property, it’s essential to be careful and evaluate how well they maintain the home and yard. Make sure to inquire with the current owner about any past or current insurance claims, especially those related to tenant damage. Too many prior insurance claims might cause difficulty in getting insurance coverage for the property after the purchase.
If everything looks good, you might have discovered a great rental property with tenants in place. 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 tenants are in place when you buy the property, once the sale is done, you are responsible for managing and maintaining it.
Property management can be complex and time-consuming, especially if you’re doing it yourself. Consider outsourcing the daily management tasks to the professionals at Real Property Management Tidal. For more information about our property management services in Smithfield and nearby, contact us today or at 757-206-2071.
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