Buying over a tenanted home is the ultimate shortcut for property investors. You have someone paying you rental income as soon as you take ownership the house. Because of this, you cover your mortgage from the get-go and save valuable time and expense looking for a tenant. But, before you dive into buying a property with tenancy, ask yourself these key questions to avoid getting yourself into more trouble a paying tenant is worth. (If you’re selling property with tenants, there are also tips for you to help you close the deal smoothly.)
How long has the current tenant has been staying?
Assuming you’re buying for the rental income, longer is generally better.
If the tenant has been staying for many years, they likely enjoy the location, and may be more agreeable to some of the changes you want. There’s also some inertia involved in moving (people get used to the neighbourhood, and everyone hates to pack their stuff and move), so the longer the tenant has been here, the more you can probably count on the lease being renewed.
If the tenant hasn’t been staying long, or there’s a history of tenants with short (six month) leases, then you need to ask why. There may be good reasons, such as the property mainly being rented to students who are waiting for dorm rooms – but then you need to consider if you’re happy to take over, when that’s the main demographic.
Tip for selling property with tenants: If you’re leaving behind a long-staying tenant, highlighting this to the buyer during viewing could increase the appeal of the property to him/her.
How does the tenant feel about what’s happening?
Before you buy, suggest a quick three-way conversation between you, the current tenant, and the seller. You mainly want to decide if you’re going to honour the current tenant’s needs/situation, and if they’d be happy with your expectations as a new landlord.
The seller should also clarify details such as concessions they’ve made to the tenant (e.g. accepting a lower rental rate for an upfront payment for the entire year), and any loose ends such as utility bills that the tenant still hasn’t paid.
Look out for any concessions that result in a higher rent. Sometimes, tenants agree to pay more after the landlord makes certain promises, such as providing a weekly cleaning service or fibre optic wireless internet. Tenants are not likely to keep paying the same rates, if you don’t fulfill the promises of the previous landlord.
If you can’t see eye to eye with the tenant, you may want to work out a mutual agreement so they can move and you can get a new tenant in quickly. In any case, the point is to ensure a smooth handover is possible, before you take the final steps to buy. Don’t rush to buy first, and then try to muddle through the chaos later.
Tip for selling property with tenants: Initiate the three-way conversation. Increasing an interested buyer’s involvement this way can fast track the deal by showing that you’re a genuinely motivated seller.
What are the unwritten rules established with the previous landlord?
Checking out the old Tenancy Agreement (TA), and drawing up a new one, isn’t difficult. But what you really need to look for are the unwritten rules that the seller has previously established with the tenant(s).
For example, the seller, as a landlord, may tolerate the tenant smoking in the house, even though it’s not allowed in the TA. Some landlords permit tenants to replace existing furniture with just a quick text message; as such, the inventory list may no longer match the actual contents of the house. Such issues need to be clarified with the tenants so they understand your new expectations.
For units with unrelated tenants (e.g. you have five individual student tenants), clarify how things work between them. For example, find out how they split costs such as the utility bill. If one of them works from home and uses the air-conditioner all day, is the bill still evenly split between them? Knowing details like this will help you smooth out any potential conflicts later.
Tip for selling property with tenants: Let the tenant know that any unwritten rules may not be enforced with a new landlord. Then, ascertain if the tenant will be staying on without these concessions. To avoid buyer-seller disputes, you wouldn’t want to be promising a tenancy with the property if the tenant is intent on moving out without you as landlord.
Have there been any complaints about the tenant?
Check with the condo’s security or management and/or talk to people in the neighbouring units about the tenant. If it turns out you have a tenant from hell, the seller won’t be eager to disclose that.
You’ll want to know beforehand if the tenant is the sort to run unlicensed businesses in the house, mine bitcoins (and incurring a $500 monthly electricity bill), or come home drunk and screaming at 3am (you’ll have to deal with the drama when condo management calls you).
The tenancy is supposed to boost the value of the property, not become a source of headaches and endless phone calls.
Tip for selling property with tenants: If you have a troublesome tenant, it might be good to terminate his/her lease with notice before you put the property up for sale. Otherwise, the tenant could continue to inflict damage on items you don’t know about, for instance, or affect the staging of the apartment in any way during buyer viewing (e.g. leaving a mess).
Is the security deposit accounted for?
The seller is supposed to transfer the tenant’s security deposit to you; make sure they do so once the house is in your possession. There have been cases where the seller moves abroad before returning the deposit, and all future attempts to contact them fail. Besides this, you should have the house inspected as soon as you take over, to ensure there’s no damage that the seller hasn’t accounted for that might have been caused by the tenant(s). This will impact your decision on whether to retain the security deposit later.
Tip for selling property with tenants: Notify your agent of any withheld tenant security deposits if you intend to take a hands-off approach in the process of selling the house.
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If you found this article helpful, 99.co recommends 99.co Guide: Breaking lease and early termination of Tenancy Agreement and 9 reasons why renting out to student tenants is best for landlords
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