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How to Handle Inherited Tenants: Reviewing Leases, Raising Rent & More

How to Handle Inherited Tenants: Reviewing Leases, Raising Rent & More

5 min read
Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.

Experience
Brandon began buying rental properties and flipping houses at the age of 21. He started with a single family home, where he rented out the bedrooms, but quickly moved on to a duplex, where he lived in half and rented out the other half.

From there, Brandon began buying both single family and multifamily rental properties, as well as fix and flipping single family homes in Washington state. Later, he expanded to larger apartments and mobile home parks across the country.

Today, Brandon is the managing member at Open Door Capital, where he raises money to purchase and turn around large mobile home parks and apartment complexes. He owns nearly 300 units across four states.

In addition to real estate investing experience, Brandon is also a best-selling author, having published four full-length non-fiction books, two e-books, and two personal development daily success journals. He has sold more than 400,000 books worldwide. His top-selling title, The Book on Rental Property Investing, is consistently ranked in the top 50 of all business books in the world on Amazon.com, having also garnered nearly 700 five-star reviews on the Amazon platform.

In addition to books, Brandon also publishes regular audio and video content that reaches millions each year. His videos on YouTube have been watched cumulatively more than 10,000,000 times, and the podcast he hosts weekly, the BiggerPockets Podcast, is the top-ranked real estate podcast in the world, with more than 75,000,000 downloads over 350 unique episodes. The show also has over 10,000 five-star reviews in iTunes and is consistently in the top 10 of all business podcasts on iTunes.

A life-long adventurer, Brandon (along with Heather and daughter Rosie and son Wilder) spends his time surfing, snorkeling, hiking, and swimming in the ocean near his home in Maui, Hawaii.

Press
Brandon’s writing has been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media.

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YouTube
Instagram @beardybrandon
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When you purchase a rental property, it may come with tenants in place, and those tenants will suddenly become YOUR tenants. These tenants are known as “inherited tenants.”

Inherited tenants can be beneficial, as you will not need to immediately spend time filling the vacant unit, and you’ll be receiving income from day one. However, inherited tenants can also be risky, as they were not put in place by you, and you don’t have a clear indication of how well they were screened or what type of tenant they are.

Furthermore, they may have been poorly trained by the last owner and will need to be re-trained to follow your rules and way of doing business. Or maybe those tenants will be absolutely perfect, and you’ll be thankful to have them.

The truth is, you won’t really know for sure until you begin dealing with those tenants. However, there are a few things you can do to increase the chance of a successful acquisition of inherited tenants. But before we get to that, understand that legally, the leases go with the property, which means everything about the lease stays the same when you take over. For example, if you purchased a property and the existing tenant was three months into a one-year lease, you would be required to abide by the terms of their lease for the next nine months. Again, the leases go with the property.

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Review Existing Leases

Before closing on the property, you will definitely want to review the leases for each existing tenant to verify the income and what expenses are the tenant’s responsibility. Do they match the financials that the seller provided?

For example, let’s say you purchased a triplex and the seller claimed to get $500 per month, per unit. If the lease shows just $400 per unit, you have a problem. This is actually not as rare as you might think, as sellers like to talk about their opinion of “fair market rent” (what they think it COULD rent for) rather than what they are actually receiving. This is known as the “pro forma” rental income. If this is the case, start asking questions and be sure to run your numbers with accurate data, not pro forma numbers.

Related: 7 Types of Tenants That Are Harder to Insure (& What You Can Do About It)

Verification doesn’t end with comparing the leases to the financials. Leases can easily be altered or forged. Imagine purchasing a property, only to find out (after closing) that the lease was changed by a shady landlord. This kind of thing does happen, so you must verify the terms of the lease with each tenant before purchasing the property. This is done through an Estoppel Agreement.

An Estoppel Agreement is a simple, one-page form that the tenant fills out letting you know the terms of their lease to the best of THEIR knowledge. If the seller of the property will not let you speak with the tenants and get Estoppel Agreements, you might be dealing with a seller who is trying to hide something. If you do get the Estoppel Agreements signed and discrepancies are found, you’ll want to make sure they are cleared up before closing.

Sometimes it could be an honest mistake, sometimes a tenant might be lying to try to get lower rent, or sometimes the seller might be a liar. You don’t want to buy a property until you understand exactly what you are getting.

An Estoppel Agreement should contain at a minimum:

  • The tenants’ names and who resides in the unit
  • The lease term (including start date)
  • The rental amount due each month and the due date
  • The security deposit amount
  • Who pays which utilities
  • Who owns the appliances
  • Whether there are any pets in the property
  • Whether there are any problems or repairs needed
  • Whether there are any other agreements with the landlord

Make sure both you and the tenant sign this agreement, and keep it in their “tenant file.” This way, if a tenant tries to tell you later on that their deposit was actually $1,000 instead of the $500, you can back up your claim with their signature on the Estoppel Agreement. It’s hard to argue with that.

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Put Yourself in Their Shoes

When purchasing a property that has inherited tenants, keep in mind that they are likely aware of the sale and are concerned about the unknown. They probably have a lot of questions, like “Who is this new owner,” or “Are they going to kick us out,” or “Is my rent going to be raised?” This uncertainty for the tenant can lead to a frustrating start to your relationship, so put yourself in their shoes and try to make the process as easy as possible on them.

We like to send a letter to the tenant on the day we take over a property, introducing ourselves and the company, letting them know we are the new owners and will be responsible for taking all phone calls, maintenance requests, lease-related questions, and anything else involving their tenancy. In this letter we like to let the tenants know about some of the improvements that will be taking place at the property in the coming months. This can help reassure the tenant that you are not a slumlord, but someone who takes pride in your work.

Related: What to Do as Soon as You Deny or Approve a Prospective Tenant

Raising the Rent on Inherited Tenants

Perhaps you purchase a property with existing tenants and you know that the rents are far too low. This is common, as many landlords are reluctant to raise the rent even as the market rate climbs, leaving long-term tenants with leases far below market rent. When we purchased our 24-unit apartment complex, this was the case. Most units were renting for $475 per month, when the market rent was a full $50 per month higher than that at that time. All the tenants were on month-to-month agreements, so we could raise the rent with just a 30-day notice.

But should we? Do we tear the band-aid off right at the get-go in one swoop, or do we raise the rent slowly or only on a few units? If we suddenly raised the rent on all the tenants, it’s likely many of the tenants would move, and we’d be left with a lot of units that needed to be rehabbed and very little income coming in to help with those expenses. On the other hand, if we let the tenants stay at that $50 per month difference, that is thousands of dollars in potential rent we would not be receiving each year.

There isn’t always a clear-cut answer on whether or not you should raise rent. We personally didn’t have a lot of capital to handle that storm so we opted to keep the rent the same for most of the tenants for the first year, only raising the rent as we fixed up units and moved new tenants in. Another investor, someone with a lot more capital, may have decided to raise everyone’s rent and accept the immediate loss, choosing instead to rehab multiple units and get new tenants in quickly. It’s a balancing act and something only you can decide.

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Have you dealt with inherited tenants before?

Let us know about your experience with a comment!