Buying a house with existing tenants might seem like an odd real estate investment upon initial consideration. After all, most real estate investors would prefer to screen tenants rather than commit to a pre-existing lease agreement. Having said that, buying a property with a tenant in place does offer some advantages. In this article, we will explore the pros and cons of buying a house with tenants and help you decide if this investment is worth your while.
What to Expect When Buying a House with Tenants
Before buying a tenant-occupied property, you must first have a clear idea of what owning these real estate properties entails. In fact, there are several guidelines and obligations that you have to be aware of. Below is an in-depth look at some of the essential ones.
Tenant Rights
Understanding tenants’ rights is a critical aspect of buying a house with tenants. As a new property owner, you will have to abide by the terms of the pre-existing lease agreement. This means that you can’t raise the rental rate or modify clauses and agreements in the lease. Furthermore, you will have to follow strict guidelines if you want to force the tenant out of the rental property. This includes giving them ample notice and adhering to proper form when sending out any notice letter.
Landlord Obligations
When you buy an investment property with tenants, you also inherit certain landlord obligations. The most rudimentary one is providing a safe and habitable space for the tenant. Let’s take a look at some of the other obligations that come with buying a house with tenants:
- Maintain common areas in good condition
- Ensure the maintenance of ventilation, sanitary, and HVAC systems
- Make sure that all structural elements are intact
- Provide the tenants with access to running water and heat
- Arrange trash removal
- Handle any infestation in a quick and effective manner
It is also worth noting that there may be some additional obligations depending on which jurisdiction the rental property is in. In addition to this, the lease or tenancy agreement might have some specific requirements that the previous landlord has agreed to. That is why it is imperative that you carefully read the lease in order to make sure that you’re abiding by these terms.
The Advantages of Investing in Tenant-Occupied Properties
As we have stated earlier, buying a house with tenants comes with both pros and cons. Understanding the implication of each one is essential if you want to ensure that you’re making an informed investment decision. First, let’s go over the pros.
1- Immediate Rental Income
One of the perks of buying a rental property with tenants for real estate investment is the fact that it generates immediate rental income. You won’t have to wait months to find tenants and you might even end up with extra income after covering mortgage payments and other expenses.
2- The Property Meets All the Legal Requisites
This is another convenience that buying a house with tenants offers. As you surely know, an investment property needs to satisfy a number of requisites before it is ready to be rented out. This includes several health and safety requirements that vary from state to state. Buying a house with tenants means that all these requirements are likely in place.
3- You Don’t Have to Make Any Extra Investment
A major selling point of buying a house with tenants is the fact that no extra investment is needed. You won’t have to spend money on refurbishing the house as the property is already furnished and rented out. This is ideal for real estate investors on tight budgets.
Now that you’re aware of the pros, let’s go over the cons.
The Disadvantages of Investing in Tenant-Occupied Properties
1- There Are Some Legal Risks That Come with This Investment
One of the risks of buying a house with the tenants is the possibility that the property is not in compliance with certain laws. Some landlords don’t abide by the aforementioned legal requisites while others outright illegally rent out the property. In both cases, remedying the issue falls on the current property owner. This can result in a long legal process as well as hefty fines.
2- Removing the Tenants Can Be a Complicated Process
If for whatever reason you decide that you want out of the lease agreement, removing the tenant from the premises can drag out for months. This is compounded by the fact that some jurisdictions lean towards the tenant in these cases. Removing the tenant involves lengthy notice periods as well as the filing of complex paperwork. Seeking the assistance of professional property management will help streamline these tasks, but the process can still be stressful.
The Checklist for Buying a Property with Tenants
If you’re not an experienced real estate investor, it is advisable that you delegate the task of analyzing the rental property to a professional. A solicitor or conveyancer can unearth irregularities that an inexperienced buyer might miss. In any case, here is a brief checklist of what you should do before buying a house with tenants.
- You should make sure that the lease agreement is well-structured and in compliance with rental laws.
- You should request the transfer of the security deposit as well as all the records for any prepaid rent.
- The seller should provide you with documentation that reflects the state of the rental property before the tenant moved in.
- You need to be covered by an insurance policy that mitigates tenant-related risks.
The Verdict: Should You Buy a House with Tenants?
As it is the case with any type of real estate investment, buying a house with tenants can be profitable if you cover all the necessary bases. As long as you do proper diligence and ensure that the landlord who put up the tenant-occupied property for sale is in compliance with the law, this investment can reap decent returns and generate positive cash flow. You can start searching for tenant-occupied properties right now in the Mashvisor Property Marketplace! Click here to start your search.