What due diligence required when inheriting tenants

6 Replies

In negotiations for a my second investment property, a duplex in Georgia. Both units are occupied by month to month tenants at below market rents. The units also need some cosmetic work. What due diligence should I be doing during sales process? If I need to do updates do ask both to leave or maintain one for cash flow?

Thanks for helping out a rookie.

Hey Ceaneh,

In terms of due diligence, make sure you request copies of the lease upfront as part of your offer. This will outline rent amounts, security deposits and any other special terms in the lease (ex. allowed storage, parking and etc). Also if possible, have the seller sign an estopped to confirm both tenant are current on their rents. 

In terms of the updates, you need to think about what return you will gain from installing these updates. Example, if you put in all new floors in one of your units for $1500 and get and can expect an increase in rent of $200 that would yield a 13% return on your investment, not bad. But if it were only for a $50 bump, it may not be worth it. 

I would not be too quick to kick the tenants out, take into consideration how much they are paying and how much more you are expecting after renovation. Is it significantly different? Or not really? If the rent increases are small, I would say keep the cash flow until the tenants vacate and then do your updates. Many new investors want do dive right into the renovations when they have tenants that are perfectly fine as they are. In the end it comes down to the the numbers and the potential increase in return.

Good luck on your journey and let me know if you have any questions.

I would look at bank statements for the last 2 years if possible.  You want to see if the tenants had been paying all through COVID.  If they won't provide it, get something in writing (copies of checks, or even a written confirmation from the Sellers that they have made on time payments).  You also want to take a look at the utility bills since you will be covering them.  This is a great opportunity to see the true costs to plan accordingly.  

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Check leases.  If new tenants were secured just before it was listed it raises a red flag.  I manage a property for an owner who purchased last March and the seller had just signed a one year lease with a tenant who has zero income.  Zero.  No job.  No SSI.  No disability. She was planning to start a business, which never started the entire 7 months we dealt with her.  Fortunately she qualified for our state rental grant so the owner did get paid.  This was outright fraud IMO, but it happens all the time.  Sellers dump a tenant in at a high rent to build a rent roll.

@Ceaneh Alexis Make sure the security deposits are also transferred to you at closing. When I bought my 4plex the sellers were gone for the winter and didn’t have their checks to provide the security deposits to me.

Fortunately they were very nice about everything and when spring came and they got back, they also live next door to the property I bought, they mailed the check right out. I don’t recommend this but it worked in my case. Small town.