Is it a good idea to purchase a duplex with existing tenants. What are the drawbacks?
Yes, if you are not planning on living there (meaning you do not need to vacate one of them to move in). I would verify they are paying rent on time monthly and run their names from the leases through your state to make sure they have not been evicted before. In commercial we call this tenant grading and is usually done by the new property manager.
Yes, but be ready to take action quickly if they do not pay rent to you in time. First impressions count, and if you let them get away with paying late, they always will.
If they are good tenants then yes if they are bad then no. The upside is you immediately start making money and don't have to do nearly as much rehab upfront.
I've used it as a negotiation advantage several times in the past. The area I'm investing in has a LOT of buyers who are looking to flip multis as high end condos. They want them vacant so they can get it, do a lipstick job, and flip for cash. Most make offers contingent on vacant units, my offers are always "as is" in regards to the tenant situation. Sellers will often take my cash as it's a much easier path for them.
I of course do my own due diligence, making sure that all the tenants are paid up, month to month, and don't pose any specific known problems.
Once I have the property, I give a notice to quit to tenants in the unit with the lowest rent in the building. Once removed, I renovate the unit and rent it at market value. Once it's bullet proofed and rented, I rinse and repeat with the second lowest rent until I'm done. If the units are already nice, the tenants good, and the rents at market (they literally never are), I would just write up new leases and move forward.
Granted, ALL of the numbers have to make sense for this to work, and it's not going to work in every area, but I've found success with this approach.
@Charles Carillo thank you
@Mark Nolan thanks Mark
@Jacob Sampson Jacob, that’s what I was thinking
@Nicole A. Thank you Nicole
Depends on how long the leases are, if they’re current on rent, and the condition of units at walk through. Oh, and the price v Rents/potential. I’ve purchased occupied units, empty units, but never “about to be evicted tenants” units.
@Odayne Daley This all depends on the quality of tenant currently living in the apartment and the quality of tenant the market bears given the area it is in. One thing I have learned over the years is a longer vacancy is a lot better than a nightmare tenant from both a money and sanity standpoint.
@Odayne Daley I'm a big fan of tenants already in place. Rent rate is verfied and you buy based on actual numbers! Bonus points if the property manager has an initial walkthrough/audit of the property so you can withhold deposit from initial condition vs when you buy condition. If that's not available I'd do a very thorough walkthrough right after you buy and let the tenants know they will be held accountable from that moment forward.
Thank you guys. I’m a NEWBIE in Columbus Ohio and I’m seeing a lot of tenant occupied duplexes and I’m wondering why no investors have purchased them especially since some of them do meet the 1% rule. Is there something I’m missing ? Wouldn’t it just be as easy as getting approved for a conventional loan, doing due diligence and just start cash flowing ?
Hi @Odayne Daley , this depends mostly on what the tenant leases and ledgers look like. You want to make sure there's a solid (and legal) lease in place that would protect you appropriately as the landlord and that they have a proven track record of actually paying or you could be purchasing some headaches along with the duplex. I prefer to only purchase tenant occupied if they are month-to-month and even better yet if you make the terms of the purchase contract include tenants being gone upon taking possession so you can place your own tenants. However, if they're long standing tenants with no discrepancies and proven track record of paying on time then it can be nice to have some in place cash flow.
As with much of real estate, this is a very situation dependent topic. I'm also Columbus based so if you want to meetup and talk shop shoot me a message and we can set something up. Always good to connect with more local investors!
@Adrian Birchler I would love to meet and pick your brain.
100% of occupied duplexes that I've either bought for myself or my clients, the sellers lie. Rents are off, leases are wrong, appliances are brought into question, deposits go missing, they stop paying, etc.
Every single time.
That said, it's not a dealbreaker, but you've got to be aggressive in due your diligence and don't' be afraid to push for what you need to not get screwed. I tell sellers they need to show me leases, rents, deposits, etc. and put it in writing. Otherwise, I ask for a price reduction or an escrow hold for the amount of several months lost rent, an eviction attorney, rehab, and my time, assuming they're lying.
@Nicole A. Is spot on. I just went through this with a duplex I bought. The first month rent was due to me one of the tenants tried to pay 60% of the rent in cash (lease prohibits this) saying he got robbed earlier that week but didn’t bother to tell me until rent was due. I refused his attempt and served him with a 3 day notice to pay or vacate the next day. He paid in full 2 days later and said it wouldn’t happen again.
I think it depends.
If they are paying far under market rent and have a lease , you’re stuck until their lease ends.
If they weren’t properly screened you could inherit a tenant who actually can’t afford the unit or has a criminal background.
If however the prior landlord had a thorough screening process and lease and the tenant was paying fair market rent, then I think it would be great you’re receiving rent checks right away.
If you need tenants to show income to get loan approvals then yes. If you can buy vacant I've found that's always been the best route for me. That way you can bring the units up to snuff and then you can choose whomever you please to occupy your units.
The drawbacks are:
1) You’re contractually obligated to keep those tenants with respect to their lease length and terms. This may be problematic because they may be tenants you would NOT lease to under your standards.
2) If you have FHA or VA financing you can't move into one of the units unless at least 1 of the lease's end is imminent (2 months typically). This would disqualify your financing.
3) You would be forced to purchase with investor financing which would require you to put down at least 20% of the purchase price.
The only thing I'd say to be mindful of is that some tenants have what I call Owner Complex.
So, as soon as you close on the deal let them know quickly that a new sheriff is in town and get an estoppel agreement filled out.
For the most part, you should be fine. Good luck.
I like @Jim Iorio 's post above. At the very least, know that anything, and I mean anything in this business is possible when you rent to people you don't know. That being said, I would not be (and am not) scared to buy any unit with an existing tenant. Columbus is a market that (I think) assists the Landlord very well in helping remove problem tenants. Worse come worst, it takes about 3 days to evict if they are not paying, break a lease, etc. Just have this built-in to your numbers. At the very least, you're just assuming carrying costs.
@Odayne Daley assuming you are financing the property. The interest rate would be higher obviously for an investor versus owner occupied loan.
@Charles Carillo . Yes, but maybe ask the neighbors if there are any close by. If you buy be sure you get tenants security deposit transferred to you at closing.