Let’s talk about buying a house with tenants already in place.
Rental property and tenants go together like peas and carrots, and if you can buy rental property with tenants already already living in it, even better. Right? Maybe. Here are 5 things to consider before you buy that occupied property.
#1 Is there an active lease in place?
At least where I rent properties in Missouri, the lease binds to the owner. So, if you are contemplating buying a house with tenants in it, you are bound to the terms of that lease. If that’s the case, make sure you read and understand the terms of the lease thoroughly.
Buying a house with tenants and, thus, inheriting an active lease may not be a bad thing as long as you are agreeable to the terms. The last thing you want to find out after-the-fact is that the lease states that the landlord pays all utilities, or the landlord handles lawn care, etc. Furthermore, with an active lease in place, you can’t raise the rent until the lease expires.
FREE Real Estate Investing Checklist. Instant Access.
#2 Ask the seller about the tenant
You’ve got to approach this one with a bit of tongue-in-cheek because how do you know whether or not you can trust the seller? However, ask for feedback anyway about the tenant. Here are some questions you should ask?
- Is there a security deposit on file? (should be stated in lease)
- Is there a pet deposit on file (should be stated in lease)?
- Has the tenant ever been late paying rent? How often? How late?
- Does the tenant want to stay in the property long-term?
#3 Be sure you tour the property
I know this seems like a no-brainer, but sometimes touring the property isn’t practical or possible. Maybe you’re buying a property out-of-state, or maybe you’re out-of-town on business, and need to act fast.
Do whatever you can to tour the property, though. I bought my first 20 or so properties out-of-state, and in some situations I had the real estate agent do a FaceTime tour with me. You need an understanding of the property’s current condition.
#4 Inspect the property thoroughly
Don’t assume the seller is willing to disclose known defects about the property. Even if the seller is honest, they may not know that the property has foundation issues, or that the duct work is compromised, etc.
Now you can pay $400-$500 (possibly even more) for a property inspection, but I find that independent property inspectors don’t do as thorough of a job as I’d like.
For instance, a big surprise that you don’t want to end up with is finding out after you purchase the property that you’ve got a faulty sewer line. This can easily become a $2000-$4000 repair, and it has to be fixed because if a sewer line goes bad, your tenants have no working plumbing. Property inspectors won’t inspect sewer lines, but a plumber will.
So, here’s what I suggest doing instead of hiring a property inspector. Hire a plumber, electrician, roofer & HVAC professional to do their own evaluations. They’ve got more knowledge in their respective trades than the average property inspector, and their inspections will be more thorough. The cost will be about $75-$100 each (some may not charge at all), so the cost will be about the same as hiring an independent property inspector.
#5 Read the Seller’s Disclosure Statement
If the occupied property you’re buying is an active listing (on the market), then there should be a seller’s disclosure statement on file that your agent can access for you. First, see if the seller filled it out. I’m leery about sellers who sign a disclosure statement, but leave it blank. What are they potentially hiding?
If the seller has filled out the disclosure statement, take the time to read it thoroughly, and see if the seller disclosed any issues.
Buying a house with tenants can be a great thing. If the tenants are quality, and pay their rent as they are supposed to, then you’ve got a property that will provide you with positive cash flow from day one. Like anything else though, do your due diligence, and make sure your purchasing decision is an informed one.