Hey folks, I am ready to start investing in rental properties and am meeting with my realtor soon. A lot of the places I have been looking at are currently fully rented out. It would seem that this is a positive, instant cash flow and all. What are some of the things I need to consider about existing tenants? How does the whole lease contract issue work? Do they just continue to operate on their original lease, or will I need to have new ones worked up? I have heard I should run a credit check on each of the existing tenants. I have also read that I should verify their rent payments (have they been paying on time, etc.) All in all, it would seem to be a positive thing to have existing tenants, what are your thoughtts? What factors am I not considering?
Real Estate Investor · Reading, PA · Member since 2008 · 227 posts · 7 votes
19y
Existing tenants mean instant CF for you but you could be inheriting bad tenants. With that being said even if half of the tenants needed to be evicted, you could do so at a rate that won't leave you holding the bag. Looking at the lease agreements is going to be the most important issue for any one taking over tenants.
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
19y
Leases run with the PPTY, not with the owner, so you will "inherit" the tenants. Sometimes you inherit good ones, sometimes-not so much. Even on inherited tenants I always switched them to MY LEASE, same expiration date.
Part of your due diligence is to verify rental and SECURITY DEPOSIT amounts. The security deposits will be credited to you at closing.
You will have a positive cash flow if your NET CASH FLOW exceeds your (pro rated) CASH OUT OF POCKET, ALLOWANCE FOR VACANCIES AND REPAIRS, COVERS YOUR INSURANCE, TAXES AND DEBT SERVICE.
Good info guys, thanks. About switching them to your own lease - that was a big questions of mine. I understand they won't get kicked out because a new landlord bought the property, but how do you go about switching them over to your own lease? My thoughts (and I am new, so who knows if this is a good idea, legal, etc.) would be to have them sign a new lease with me (and MY conditions) and at the same time extending their term giving me a good chance at a solid year of no vacancy. What are your thoughts on that?
Another thing to watch out for, though it's probably not that common, is tenants paying inflated rent. I've heard of landlords getting their friends in there and officially charging them an above-market rent to make the property sell at a higher price. Once that tenant moves out, though, there's no way to get that same rent. This would happen more with SFR than multiunits, but I've even seen this happen on commercial deals (where a business will be selling its own building to lease-back and agrees to pay rent well above market, duping the buyer into paying well above market price).
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
19y
Hanger (and kind of mwarden) wrote:
That's called SALEMANSHIP. I've told them, "you know the law changed since you signed your lease and in order to come into compliance with the new state law, THAT GIVES YOU MORE PROTECTION, you will have to sign this new lease".
Hanger wrote:
Not necessarily, I want to extend them to come up in the summer, or point out how much UNDER MARKET their current rent is and offer them a SMALLER INCREASE to sign now, increase to take effect at end of current term.
You always want to increase rent EVERY YEAR (or every end of lease) in order to train your tenants to expect increases, and to encourage the good ones to sign longer term leases in exchange for SMALLER increases.
TN apprentice wrote:
Sounds like someone took "due dilegence" to mean "believing what an interested party told me" instead of what my own investigation revealed.
That's called SALEMANSHIP. I've told them, "you know the law changed since you signed your lease and in order to come into compliance with the new state law, THAT GIVES YOU MORE PROTECTION, you will have to sign this new lease".
And I'm sure 99% of the people you tell this to are dumb enough to believe it, but I have rented before and I would never buy this. If you want me to sign a new lease, it's because it's to your benefit, not mine. I would tell you to take a hike.
My question was, for this 1%, then what do you do?
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
19y
mwarden,
For the percentage of tenants that won't sign a new lease, you are obligated to follow the existing lease. I've taken over many buildings and had tenants under the previous leases. If they won't sign a new one, then I just change them over once their old lease is up.
Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
19y
Originally posted by "MikeOH":
mwarden,
For the percentage of tenants that won't sign a new lease, you are obligated to follow the existing lease. I've taken over many buildings and had tenants under the previous leases. If they won't sign a new one, then I just change them over once their old lease is up.
Mike
Mike, thanks for clarifying.
I also suggest that you do not lie or otherwise misrepresent the facts to any tenant. If you want them to sign a new lease ask them. Explain that you want everyone on the same lease. That when they lease expires this is the lease they will be expected to sign if they renew. Provide positive incentives. I would not tell them there were legal changes and that the new lease will benefit them to induce them to sign unless you are sure of your facts.
In some states a judge at an eviction would not take kindly to hearing such stories. Better to negotiate honestly.
If you feel the present lease is crap then deal with it before you buy. The seller created the problem so let them pay to fix the problem. Explain to the seller you want vacant possession or you want signed leases that come into force the day you take over. Then work with the tenants to agree a new lease effective the day you buy or make it clear that they will be moving soon.
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
19y
John,
I agree with that. Credibility is very important as a landlord. When I tell a tenant to do something or they will be evicted, I want them to believe it.
Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
19y
First off, what exactly is it that you want to change? Generally, you can change the "house rules" simply by giving 30 days written notice. These rules have to apply to everyone on the property, but you can accomplish quite a bit with this, including (check your local laws) late fee charges, and most other items EXCEPT the term and base rent. It can also NOT "materially alter" the original bargain--in otherwords you can't, for example prohibit parking in the driveway. You CAN prohibit unlicensed vehicles on the property.
Again, depending on what it is you want, you can ALWAYS negotiate. Offer $$ (in one form or another) and people will do most anything. Of course, if the unit is severely under priced, you're probably out of luck. Just be SURE to make it clear to them they will be a holdover tenant, subject to holdover rates (per the existing lease or local law) if they stay one day extra!