Buying a rental property with tenants already in place is not only convenient, but it’s also a fantastic opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. 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, don’t assume that a leased property is in good condition or that the tenants are reliable and pay rent on time. Rather than assuming, conduct careful due diligence to ensure that the leased property is a good investment.
The first thing to examine when considering 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.
Because the lease is a legal contract, you’ll need to accept its terms until the lease expires or can be renewed. There are instances when the tenant has agreed to end the lease once the property is sold, but this is not typical. Usually, you’ll need to be familiar with the previous agreements that will govern your new investment.
Assess tenant payment history and lease terms
Along with reviewing the lease documents, it’s essential to carefully screen the current tenants before purchasing the property. Treat this screening as if the tenants were first-time applicants, performing background checks, credit checks, and confirming 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. For a complete view of the property’s current condition, you should personally inspect the house and yard.
Since tenants are already occupying the property, it’s important to be cautious and find out how diligent they are in keeping it clean and well-maintained. It’s also important to ask the current owner about any recent or past insurance claims, especially if they were caused by the tenants. Multiple insurance claims could make it harder to secure insurance on the property after the sale.
If everything checks out, you may have found a great rental property that already has tenants. 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. While your new rental may come with tenants, once the sale is finalized, the responsibility for managing and maintaining the property is fully yours.
Managing a property can become overwhelming, particularly if you’re handling it all by yourself. Let the team at Real Property Management Momentum take over the day-to-day tasks for you. For more information about our property management services in Ozark and nearby, contact us today or at 417-324-7601.
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