Are you a landlord or investor thinking about buying a property with tenants in place? While there are a few key considerations that can make or break any real estate deal, buying a property with existing tenants has its own pros and cons. In this video, Brentnie and Kaycee from Rentec Direct answer a common landlord question and break down what to actually check before buying a tenant-occupied property.
Every real estate investment starts with analyzing the deal, and a savvy investor knows how to carefully evaluate the pros and cons of a specific property. A property with existing tenants is no exception. If you are considering buying a property where one or more of the units are currently occupied, knowing how to ask the right questions is key to avoid inherting someone else’s landlord problems.
In the newest video, Rentec Direct experts walk you through why buying a tenant-occupied property can be a smart move, as well as what questions to ask about the seller’s tenant screening and lease terms. Brentnie and Kaycee also go over the importance of an estopple agreement to protect you from suprises down the road, and how to introduce yourself to your new tenants to ensure a smooth transition. All this and more are covered in the newest Landlord Questions video from Rentec Direct.
Should You Buy a Rental Property With Existing Tenants? – Video Transcript
Brentnie:
Hi everyone, this is Brentnie and Kaycee from Rentec Direct, and we love to go over landlord questions and industry questions for anyone in the real estate industry. So let’s get into it. Someone asks: “Would you ever purchase a property with existing tenants, or only take vacant possession? They say: good property overall, duplex that cash flows. One tenant has been there for years, and another for about five months, both in good standing according to the seller.”
Kaycee:
This seems like such an obvious answer to me. And so I’m saying, yes, buy it, if that’s what you’re interested in, being an investment property owner and using it for rental income. But there has to be that caveat of yes, buy it, but there should be some conditions. So, let’s—if we dig a little further into what it means to buy a tenant-occupied rental property, we can kind of hit on what we’re looking for, or what we should be looking for, as investors when we’re purchasing a renter-occupied property. So, what are some things that come to mind?
What to Check Before Buying a Tenant-Occupied Property
Brentnie:
Well, the first thing I’m curious about is this person doesn’t say whether or not they are gonna be managing it themselves as a DIY landlord or if they are hiring a property manager. I do think that can impact your choices a little bit. But there are definitely some things that we always recommend looking out for when you’re buying a tenant-occupied home. The first thing is if you can get the numbers, obviously, like with any real estate deal, it’s gonna come down to those numbers. And so being able to see that the tenants are in good standing, that the property is having that good cash flow, that tenants are paying on time every time, that’s a very good indicator that it’s going to be a good situation for you. But there are other contingencies that you can be asking for. You can find out about the landlord’s tenant screening process. You can find out what kind of a lease these tenants have right now.
Kaycee:
That’s a really important, because when you’re buying a renter-occupied property, it is your responsibility to assume that lease in that contract. So if it’s a year-long lease, you have to, as the new owner, take over that lease. You can always execute a new one if the tenant agrees to it, but if the tenant’s like, “Nope, I have this lease, I don’t want to sign a new one,” you have to maintain that lease. So asking for a copy of that lease before purchasing, I think, is very important due diligence.
Brentnie:
Yes, absolutely. And the state that you’re purchasing the property in is going to impact that as well, because there’s some places where you’re dealing with a month-to-month lease. And so that means once you take ownership, you have a lot more availability if you want to start fresh to end the lease terms.
So that is one of the first things that you should be looking at, for sure.
Kaycee:
And I think it’s important to look at those numbers of not only what rent is, but what you’re hoping to get for rent, and if you’re even gonna be able to raise the rent to that market rate. You might be investing in properties and you’re like, “Market rate in this neighborhood is twelve hundred dollars, and this property is gonna cash flow at eight hundred dollars, but I can raise it up to that twelve hundred dollars a month. So that’s gonna be this huge new profit that I can make right away.” But your state laws might prevent you from raising it to the market rate if you have a tenant that’s been in there and you don’t have any options to raise the rent on them. So that’s happened to me before. We bought renter-occupied properties that should be at a different market rate, but they’ve been long-term tenants, and still we cannot get the rent up to the rate because of the rent control laws that are in our state. So that’s an important part when you’re doing your numbers—to really understand not just what market rate in your region is, but the feasibility of getting a unit with a tenant in it up to market rate. Because once our unit gets vacated, we’re gonna be able to raise it to whatever we want. But as long as that tenant’s still in there, we’re not able to raise it beyond a certain threshold every year. So make sure to be versed in your landlord-tenant laws and that rent control also.
Brentnie:
Yes, for sure.
How to Vet Existing Tenants When Buying a Rental Property
Kaycee:
And when we’re talking about tenant screening, and you kind of mentioned, what were the tenant screening criteria the previous seller had? I like that question, because while you can’t ask the landlord what was their credit score when these tenants moved in, you can ask the landlord, “Well, what is your tenant screening criteria?” So the seller could say, “Well, we only ever approve tenants that have a credit score of 650 and above.” And so that gives you an idea: well, at the time that these tenants were approved, at least they had this type of credit score. And that’s up to the seller to share that information, but a motivated seller is going to want to give you the information that proves that a rental property is going to be profitable to the buyer, so they can move through that sale and make it as attractive as possible to be purchased.
Brentnie:
Yeah, and I think it could be something to look out for if you’re not getting a lot of those numbers, if you’re not getting kind of the assurance that the tenant has passed the tenant screening. Sometimes a seller will have a tenant that they’re kind of stuck in a lease with because they didn’t do their due diligence with the tenant screening process, and they’re trying to offload themselves of that situation as well. So I think as much as you can ask those questions, that is key, just to make sure that there’s not a seller who’s trying to pass off an unfortunate landlord situation.
Determining Real Estate ROI After Factoring in Maintenance
Kaycee:
And so those are kind of talking about the tenants. So, we’re saying, like, yes, get a tenant-occupied property, because finding tenants is part of the battle, right? When you’re owning rental properties, you don’t want to have occupancy, you want to have those properties vacant, collecting rent, having cash flow. So if you can purchase an investment property that already has that in place, that can be a great situation, given that they are well-qualified tenants and they’re gonna meet your tenant screening criteria.
The next part, I think, is important to think about: with a rental property, you’re dealing with a property that might have higher maintenance needs than usual, because tenants tend to have a little bit more wear and tear on a property, and there’s always that piece of it that, like, has a tenant been reporting maintenance issues as much as possible, or do you have a renter who just, like, doesn’t really care, or they don’t know to care if they notice a spot on the ceiling. Like, what could that mean? “I rent the property, I’ve never had to maintain a home the same way a homeowner might.” So, contingencies on inspections, I think, are really important, especially given an age of a property. We bought a renter-occupied multifamily complex once, and there was so much water damage in that property that we really had to figure in the maintenance needs of the property into our numbers. And so that was an important thing to do.
So those are the different things to think about is how a renter has taken care of a property and how the rental property owner has taken care of a property. And if they’re not fixing things as much as a true primary residence owner might.
Introducing Yourself to Your New Tenants
Brentnie:
Yeah, I think that also leads to another good point, which is that even with good tenants, there are going to be those challenges that you have to overcome if the tenant wasn’t used to something like quarterly inspections, seasonal inspections, or any of those kinds of things that you should be doing just to keep your property at its best. Something that can help with this is just sending a landlord introduction letter to your tenants. We do have a sample letter. We can post it in the comments below. We have it on our blog, and that can really help start you off on the right foot, where you’re introducing yourselves, you’re taking the time to let your new tenants know about you and how to get in contact with you, giving them any pertinent information, and also just helping to kind of set the stage as you transition, I think is very, very helpful.
Kaycee:
Yeah, I think that’s a good point, of thinking about how you want to introduce yourself to your tenants and help set the tone, because it’s gonna be stressful for your tenants. That’s what I have found, just when we’ve purchased renter-occupied properties and we’ve done the walkthroughs even prior to buying it, of these people are so nervous thinking that as soon as a new owner takes over, that they’re gonna get evicted. And I’m just walking through to be like, “We just kind of wanna see the condition of the property, like, no fault on the tenants, like, we’re just looking to see if this is still gonna be something good to purchase.” And so, as much calmness and welcoming that you can invite into the relationship from the get-go, I think can be really helpful to lay a good groundwork for that landlord-tenant relationship. I found that very valuable.
Understanding Estoppel Agreements When Buying a Rental Property
Brentnie:
Yes, absolutely. And I think, alongside of that, some of the onus should be put on the current landlord too, to help smooth that transition as much as possible. One thing that can be really, really beneficial is to have the tenants and the seller create an estoppel agreement. And this just goes over the current lease terms, so that you and the tenants are completely aware of security deposit amounts and any, like, special allowances where a tenant maybe calls and says, “Hey, can I have a cat?” and it’s not written into the lease agreement, or, “Can I plant some flowers over here?” or, “I bought this AC unit,” and the landlord didn’t—all of those little addendums that maybe were happening verbally or across email that you don’t have—those things can be included in an estoppel agreement, so that when you take over, everything is written out in a very clear, concise, legal manner, so that everyone starts off on the right foot. And I think that that can eliminate a lot of that stress and that nervousness for your tenants too, because everything feels very clear. And that’s very helpful.
Kaycee:
Thank you for mentioning the estoppel agreement, because that is a really good point. Not only those, like, random lease terms, but the security deposit—like how much was actually paid, who owns it, and where does it exist, what account. Because the security deposit should transfer from the seller to the buyer in a trust for that tenant, however your state laws require it. Sometimes a seller will pay it back to the tenant, and then the tenant provides a new one to the buyer—that can be a little confusing. But then also, appliances—like who owns what appliances. We live in a community where landlords used to never provide appliances. So now, when I’m buying rental properties, that’s definitely something I ask about, because now every unit has to have a refrigerator. But 15 years ago, units didn’t come with refrigerators. So if I’m buying a property that has had the same tenant for 20 years, I really gotta know.
Brentnie:
Yes, absolutely. And getting that estoppel agreement now means that you’re not stuck dealing with an awkward situation in a year. Everything is just very clear and concise, and that’s so important.
Kaycee:
So, to sum up: yes, buy a renter-occupied property. If you’re interested in being a landlord, or your property manager should be able to help you through that purchase. If you have worked with one before, if you’re interested in working with one, check your tenant screening, check the lease, work on estoppel agreements to figure out what lease terms you need to identify before your start of managing the new lease and assuming that, and create a great landlord-tenant introduction letter, and set yourself up for a great landlord-tenant relationship moving forward.
