Purchase with or without tenants?

5 Replies

I'm new to REI and have started looking into my options for a multi family home to rent out. What are people's thoughts on purchasing real estate that is already occupied by tenants? I can see a con being that the tenants may not be ideal. I could see a pro being that I wouldn't have to start marketing right after purchase.

What about rehab/increasing value if there are existing tenants? Raising rent?

For an example of one of the properties I've looked at, there are two professional tenants on the first floor, and a two bedroom on the second floor - both are month-to-month without leases.

@Stephanie Minor I think it depends... do  you have rent control or not in your farm area?  If you don't then you can build strategies around existing tenants.  I bought 8 units in a free market area.  I was able to rehab 1 unit at a time and move my tenants into the rehabbed units and increase rents as they moved into nicer apartments.  It allowed me to keep a stead flow of income while I was doing my rehab work.  In another property that I am in contract on, I specifically targeted the building because it was empty.  The city that the property is in, has rent control.  Trying to get tenants to move out so I could do renovations was not something that I really wanted to do...

Good luck!

-Arlen

@Arlen Chou thank you for the wise words regarding rent control and rehab. 

The property has potential to bring in more rent once it gets a facelift, but I'm not sure how that's possible with tenants already occupying the space. At least with the professional unit, there's the possibility of getting in some time to complete work while the office is closed I guess. Beyond that, I guess I'd really have to weigh it.

I think I have an idea of vacancy rates in the area, but not enough to make me 100% confident that I'd fill an empty property quickly. Maybe I should give myself (and the property I choose) some more credit though :)

Thanks again!

Originally posted by @Stephanie Minor:

I'm new to REI and have started looking into my options for a multi family home to rent out. What are people's thoughts on purchasing real estate that is already occupied by tenants? I can see a con being that the tenants may not be ideal. I could see a pro being that I wouldn't have to start marketing right after purchase.

What about rehab/increasing value if there are existing tenants? Raising rent?

For an example of one of the properties I've looked at, there are two professional tenants on the first floor, and a two bedroom on the second floor - both are month-to-month without leases.

 What do you mean by professional tenants?  Do you mean commercial tenants?  You mentioned an office?

In rent control, or Section 8, you often can't kick the tenants out without "cause," even if they're month-to-month tenancies.  So, you'd need to be sure you have no restrictions on being able to kick them out, or raise their rents, if you want to.

Then, if possible, get proof that the tenants are up-to-date on their rents.  

If both of the above are good, then I wouldn't think there'd be an issue with the tenants being in place when you buy, because you would only have to give them 30 days notice to move - or whatever the requirement is for where they are.  For instance, in CA if the tenants have lived in the unit for over a year, you have to give them 60 days notice.

But, if you aren't inheriting rent control tenants, or Section 8 tenants, or tenants who will need to be evicted for nonpayment of rent, it should work out, in my opinion.

Stephanie,

Any lender will want to see a current rent roll to see that there is existing income.  If you start with no renters, then you need to have a solid business plan that shows how you will quickly acquire renters.  Both are viable strategies.  It really depends on your resources and your vacancy contingency plan.  You may want to ask other landlords in the area how long it takes them to fill a vacancy.  Also research the percentage of renters in the neighborhood to be able to build a solid business plan. 

Thank you @Sue Kelly and @Rita Bautista!

The professional/commercial unit downstairs is a pair of dentists. 

Thank you for letting me know what lenders are looking for as well in these situations. I have researched rental rates in the area, and it appears that there is a high percentage of long-term renters. I'll have to look into whether the reasoning behind that is the high price of homes in the county, or if this neighborhood has more rent stabilized apartments.

If you think of anything else I should look into to build my case either way, let me know!

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