Buying investment property with tenants good idea?

Question

I’m planning to buy an investment home that is already  rented. The tenant lease expires in a year. What do you think? Should I go for it?

Thanks!

Nathan Gesner · Answer

If you decide to make an offer, be sure to ask for an estoppel. I will explain below.

Buying with tenants can be good or bad. Are they paying market rents, or close to it? Are they caring for the property? Do they have a strong written agreement? Any lease violations or concerns?

You have to consider the numbers, then compare that to reality. If market rate is $1,500 and tenant has agreed to pay that, then the numbers look good. But the reality may be that the tenant hasn't paid in two months, or pays 20 days late every month, or their dog is destroying the carpet, etc.

There are literally hundreds of threads explaining the dangers of buying a property with existing renters. Use the search bar and spend an hour or two reading.

ESTOPPEL

Your offer to purchase should include a requirement that the Seller provide all documentation and agree to sign an estoppel certificate (also called an estoppel form or agreement). The estoppel is a form filled out by the tenant, then confirmed by the Landlord, and then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was $2,000 because they paid the last month's rent. How will you know? An estoppel certificate fixes this problem.

Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchanging "doc" with "pdf" for more options.

Here is an example and explanation: Sample Estoppel

Some have a lot of legal jargon but this document does not need to be so detailed. This is an essential tool for anyone buying a tenant-occupied property.

Eric DeNardo · Answer

@Paco Rabi,

It's definitely nice to have existing tenants in place because they will be paying rent as soon as you close! Having said that, typically the rents aren't up to market value and you could be inheriting bad tenants. It's important to look at the rent role and history (if available) to see if your tenants are paying on time. and review their current lease.

William Sing · Answer

Hey @Paco Rabi,

Great question! Buying a property with existing tenants can definitely have its perks, especially if you're looking to hit the ground running with rental income. However, there are a few critical factors you'll want to consider before making your decision.

• Tenant History: Try to get a sense of the tenant's payment history and overall reliability. This can give you insight into what to expect and whether any issues might arise.
• Lease Terms: Review the current lease terms carefully. Understand any obligations, rules, or peculiarities that might affect your management style or investment strategy.
• Condition of the Property: Ensure you know the current state of the property. Sometimes properties with long-term tenants might require significant maintenance or updates when the lease turns over.
• Local Market: Consider the rental market in the area. If the current tenant moves out after their lease, how easily can you find a new tenant, and at what rate?
• Legal Compliance: Make sure you’re up to speed on landlord-tenant laws in your area, especially concerning lease transitions and tenant rights.

If everything checks out and aligns with your investment goals, this could be a great opportunity to have a steady income stream with minimal vacancy delays. Just ensure you're prepared for the management responsibilities that come with inheriting tenants.

Cheers,

Will

William Sing · Answer

You can ask for rent rolls/leases if you'd like. Sometimes the sellers may or may not have that readily available or may only provide it for those under contract since usually there is paperwork around that that requires certain investment docs to be provided.

Paco Rabi · Answer

The tenant's lease expires in one year. Can I ask the current owner all the information above before putting an offer? Thank you for your support @William Sing

Buying investment property with tenants good idea?

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