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Okay, so You Just Got Your First Inherited Tenant – What Now?

by Kevin Perk on July 7, 2014 · 10 comments

  
Okay, so You Just Got Your First Inherited Tenant - What Now?

Investing in rental properties often means inheriting existing tenants. Inherited tenants bring both positive and negative attributes to the transaction.

What to do with Inherited Tenants:

What you as the new owner do with inherited tenants most likely depends on two things:

  1. The terms of the tenant’s lease, and
  2. Your plans for the property.

First, you as the buyer need to be aware that a transfer of ownership does not void a tenant’s lease. If your inherited tenant is in the second month of a 12 month lease, you have to honor those terms and allow them to continue to reside at the property for 10 more months at their current rental rate.

Related: AHHHH! 8 Actionable DIY QuickTips to Save Hundreds on Your Next Nasty Tenant Turnover

If for some reason you want this tenant to leave the property you will likely have to buy them out. Does that mean you have to offer them the entire amount left on their lease? Perhaps. But it is much more likely that you may be able to make some kind of deal. However if the tenant does not wish to leave, you are likely stuck with that tenant.

Rehabbing

Secondly, you as the new buyer may want to rehab the property, or increase the rents and thus increase the value. Or the property could be in a satisfactory condition and you could also just be looking to let things ride as they are.

If you wish to rehab the property, and if the terms of their leases allow it, it would be best if the tenants were out of the way. But, you still can’t just ask them to leave the day after you close. You must give the tenant proper notice.

Rent Increases?

The same holds true for any potential rent increases. You as the new owner cannot simply impose new rents without proper notice.

Related: How to Increase Investment Value by Increasing Rental Income

So what is proper notice? That will vary depending on the existing lease and your local laws. A good rule of thumb is to generally give at least a 30 day notice. I try to give a little more to be courteous.

If you want to just let things ride along as they are then really all you need to do is to introduce yourself to your new tenants and provide them with your contact information and where the rent should be paid.

With inherited tenants, the upside is that you instantly have cashflow (I hope!). But, you also have tenants that have not been through your screening and approval process. You have to weigh the potential risks there.

No matter what you plans for a property purchase, when deal with inheriting tenants always use an estoppel agreement. It will protect both you and the tenant should a problem arise. And in this business, problems can arise very easily.

Have you ever inherited a tenant? What did you do?

Be sure to leave your comments below!

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{ 10 comments… read them below or add one }

Narelle Myke July 7, 2014 at 9:13 am

Hi Kevin,

This article hits home for me. I inherited a tenant in February 2014 in my first investment duplex. She paid her rent for March and I had to initiate eviction proceedings because she did not not pay April, May, or June’s rent. She magically came up with all the rent for those 3 months plus late fees and I consider myself lucky that her preexisting lease expires at the end of July — this month. Why? Because she has also decided not to pay July’s rent of course!!

My key learnings in this process: (1) Do not take the word of the seller on the tenant’s history, background, and performance. Conduct your own background checks and ask to see PHYSICAL EVIDENCE of rent payments while the tenant was living in the unit (2) I will certainly be using estoppel agreements from now on.

Question for you: If you are interested in purchasing a property where the tenant(s) have no lease agreement in place and are paying the current owner cash, would you handle the situation any differently from what you’ve advised in this article?

Reply

Kevin Perk July 21, 2014 at 10:18 pm

Narelle,

Thanks for sharing your experience.

To answer your question, I would not handle anything differently. I would use the estoppel agreement and get both the tenant and the landlord to sign it. That should protect you.

Thanks for reading and commenting,

Kevin

Reply

George Smith July 7, 2014 at 10:33 am

Thanks Kevin for the useful info as always . One other thing I try to do is get up to speed with the existing tenants regarding possible ongoing issues(maintenance, other tenants, wants, etc). “A jacuzzi?, I’m sorry..that’s not really going to happen”.

Reply

Kevin Perk July 21, 2014 at 10:20 pm

George,

Thanks for the kind words.

We try to do that as well. In fact our estoppel agreement has a space for maintenance issues to try to get it spelled out on the front end.

Thanks for reading and commenting,

Kevin

Reply

Eric July 7, 2014 at 5:38 pm

I bought a building with four inherited tenants. Only one was paying. Closed on the property on a Friday, filed two eviction on Monday AM. One is still there after five years and current on rent.

The other left after about six months, and at one time owed over $3K. She paid and left.

Reply

Kevin Perk July 21, 2014 at 10:21 pm

Eric,

Good move on the eviction. There is a reason the owner was selling. :)

Thanks for reading and commenting,

Kevin

Reply

TeAnna July 8, 2014 at 12:11 am

What if you bought a property in New Mexico for land development, and it has residents? The residents have lived there for 7 years, with no lease and were never charged rent. What would be the laws in being able to take possession of that property? They would have to evict, correct?

Reply

Kevin Perk July 21, 2014 at 10:23 pm

TeAnna,

After 7 years there may be some rights. You are getting beyond my expertise however. You need an attorney with experience in your state and local laws. You may have a local REIA where you can get a referral.

Good luck,

Kevin

Reply

brendon woirhaye July 18, 2014 at 1:35 pm

I am a buy and hold owner/operator.

I deal with inherited tenants on a case by case basis. They are usually underpaying in rent, and although I don’t bring them up to market rates all at once, I do increase their rents on a timetable to get them to market rates within 3 years. Sometimes this requires that I do a 60 day notice if it is more than a 10% increase, otherwise I do 30 day. I don’t do this immediately upon taking ownership of the property, but usually within a couple of months after I come in and take care of a lot of the deferred maintenance and start doing minor upgrades.

I give them one chance to not pay. If they are late on paying their rent by more than 2 days, I give them a 3 day notice. If they pay within the 3 days, they get a 30 day notice. If they don’t, I start eviction (or do a cash for keys arrangement).

Tenants whom are paying but are undesirable (do not keep the place nice, have dogs that annoy the neighbors and piss on the floors, allow an adult child or brother to live in their garage, are serious hoarders) I give a 60 day notice and manage them out.

I will renovate interiors after I either cycle tenants out or through attrition, then go to full market rent on it. In one case, I renovated one side of a duplex, the tenant on the other side moved over there (and began paying almost market rent) and I renovated the side they previously occupied.

I do understand that I leave some money on the table by keeping long term tenants at low rents, but if they are good performers, the cost of me having their unit empty for a month or two while I renovate and rent it quickly impacts the money I’d gain from the higher rent. It also allows me to renovate interiors at a more leisurely pace (and less negative cash flow).

Reply

Kevin Perk July 21, 2014 at 10:25 pm

Brendon,

Some good advice in your post.

Thanks for reading and sharing,

Kevin

Reply

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