Is buying or selling a rental property with tenants on a lease a wise move? If you have a choice, then the quick answer is – it depends on the tenants.
In many states, if you are buying or selling a rental property with tenants on a lease, you can’t just kick them out because the property is being sold unless there is a specific clause in the lease that states otherwise.
In most cases, a lease will bind to whoever the owner is, so if you draw up a year lease with a tenant and sell the rental property before their lease is up, then the new owner is bound the terms of that lease as well.
A Rental Property With Tenants On A Lease: Pros & Cons For Buyer
Pro: if they’re good tenants, you’ve got immediate cash flow
Pro: you don’t have to worry about a vacant house being vandalized
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Pro: financing might be easier if the property is already cash-flowing
Con: if they’re deadbeat tenants, you’ll have to pay and wait to evict them
Con: they could trash your property
Con: they may not pay rent
A Rental Property With Tenants On A Lease: Pros & Cons For Seller
Pro: may appeal to investor buyers
Pro: you don’t have to worry about a vacant house being vandalized while on market
Pro: tenant may decide to buy the property themselves
Con: occupied properties may not show as well
Con: have to coordinate showings with tenant
Con: less appealing to owner-occupant buyers
A Rental Property With Tenants On A Lease: Recommendations For Sellers
If you’re selling a rental property with tenants on a lease, here are a few recommendations to maximize your chances of success in the getting the property sold:
Offer Incentive To Tenants
Tenants have zero incentive to cooperate with you and offer a pleasant showing experience for potential buyers. One thing I’ve done in the past is offer tenants a $10 rent credit for every showing. Tenants really appreciate this, and it can really make for a smoother selling process.
Educate Your Tenants
I’ve found that tenants can get very nervous when they find out you’re selling the property. They seem to think they are going to get kicked out, or the new owner will raise their rent, etc.
By letting your tenants know in advance that you’re planning to put the house on the market, and that, should it sell, the new owner is legally bound to the terms of the existing lease, that seems to usually put them at ease.
A Rental Property With Tenants On A Lease: Recommendations For Buyers
Here are some recommended steps to take for buyers before submitting an offer on a rental property with tenants on a lease:
Ask For Rent Receipts
Most landlords should be able to provide rent receipts via a copy of the lease ledger. A lease ledger shows the transaction history for a property including rent charges, rent payments, late fees, credits, etc.
If a landlord doesn’t have a system in place for this kind of record keeping, then ask them to print off bank statements that show rent deposits over a certain period of time.
Now, if you’re buying a property from a landlord who takes cash and doesn’t leave a money trail to follow, then there’s not much you can do.
Get A Copy Of The Lease
In some cases there may not be a written lease. If that’s the case, then the landlord has a month-to-month arrangement with the tenant. However, should a written lease be in place, obtaining a copy of it is important for several reasons.
First of all, it will obviously allow you to verify the term of the lease. Is the tenant on a year lease, six month lease, month-to-month, etc. Additionally, here some clauses to look for:
Security deposit clause
The security deposit clause should state the following:
- Security deposit amount
- Amount of time landlord has to return security deposit (usually 30 days)
- Situations in which landlord may withhold all or part of security deposit.
- remedy tenant’s default in the payment of rent
- restore the premises to its condition at the commencement of the term, ordinary wear and tear excepted
- compensate landlord for actual damages sustained as a result of the tenant’s failure to give adequate notice to terminate this lease pursuant to the law or the terms hereof; and as may otherwise be permitted by applicable law
pet deposit clause
Additionally, there should be a pet deposit deposit clause that should state the following (if applicable):
- Amount of the pet deposit
- What, if any portion, if refundable
- Types and sizes of animals allowed
The subleasing clause should clearly state that any adult wishing to reside in the property needs to first receive the landlord’s approval and be added to the lease.
Be sure to collect any prepaid deposits from the seller at closing.
As you can see there are pros and cons to buying or selling a rental property with tenants on a lease. It is recommended to you carefully weigh these advantages and disadvantages before submitting an offer.