Tenant or no tenant that is the question?

Question

Hello BP!

I wanted to get some input from some experienced buy and hold investors. When investing in a single unit or small multiple unit (2-4 units) is it better to have tenants in place or screen and place the tenants yourself? Let’s discuss

Nathan Gesner · Answer

It depends.

How strong is the market? How easily could you fill these units if they were empty?

Are the current tenants good? Have you verified that by reviewing their lease, payment history, inspected each unit carefully, etc?

If it's a smaller property (1-4 units) I would prefer to move them out so I can screen and select my own tenants. However, if I can verify they have a good payment history, no lease violations, and are taking care of their unit, I'll probably hold onto them for a period of time to test them deeper. If they work out, I'll renew them.

Ryan Murdock · Answer

Taking over a vacant 4 unit that requires turnover expense in each one plus down time filling them back up versus buying that same building with even halfway decent tenants in each unit can skew your upfront capital needs by a huge amount.

I look at leases, payment history, and unit condition. The real deadbeats should go immediately but I'd prefer to cycle through the tolerable ones one-at-a-time so as not to completely annihilate cash flow on Day 1.

Wesley W. · Answer

I've always found that I have an easier time managing and have a better business relationship with the tenants I place.  Almost all of my inherited tenants have either vacated soon after closing (or had to be evicted) when asked to follow the lease rules, or have this chip on their shoulder coming from an "I was here first and this is MY house" mentality.  There are a few exceptions I've had to this generalization, but the overwhelming majority are on a continuum as described above.

My belief is that well-managed, cash flowing properties are seldom put up for sale, so my assumption is with each purchase I'm stepping into someone else's train wreck.  Better to start fresh based on my experiences.

Michele Fischer · Answer

While we have appreciated having some tenants in place to help our transition and learning curve, we have not yet inherited a quality tenant.  We are generally happy to keep them, but just as happy to wave good-bye as soon as things go downhill or they decide to leave.

Brian Karlow · Answer

Depending on the quality of the building and existing tenant base, it could depend but I seem to be always more comfortable with my criteria in tenant selection...IMO

Jordan Moorhead · Answer

I've had good experiences with both.

I prefer to screen them myself but I've found sometimes that bad tenants are "bad"  because the landlord isn't doing his job. On the six plex I recently bought I still have 4 tenants from the previous landlord.

They're all great now and pay on time. After the building was fixed up and any issues in their units were resolved they magically started being good tenants!

Kelly N. · Answer

Hello @Kristen Ray,

We have always purchased with tenants in place, with leases having anywhere from 2 to 12 months on them.  In two cases, the seller had signed a new lease that started AFTER we closed.

In our market, sales of rental properties are almost always made with tenants in place.  It is a pretty hot market, but being in a college town turnover is fairly high anyways.  I am not aware of most communications between the seller and the current tenants, but did see letters from one very experienced landlord to his current tenants that offered them some reassurance by stating what the typical procedures looked like and what the laws were protecting them.  When we have bought properties, we leave them with an introduction letter during the walk through (typically the day before closing) stating that we have a copy of the lease and outlining the general terms of it (rent amount, end date, etc) and let them know that their security deposit will be transferred to us at closing.  In Michigan, we must honor leases that are currently in place.

The sale of the property is understandably a stressful time for the tenants, even if they have been reassured that their lease will be honored.  They are having to let the realtors show their apartment, and then must also deal with the inspection(s) and walk through once it is under contract.  I like having tenants in place since that's some guaranteed income right from the get-go, then having some time to evaluate them as tenants before we decide whether to offer a new lease to them or if we want new tenants.  With our first purchase, finding new tenants was really stressful since it was the first time we had ever done that, but after that one it hasn't been too bad since we knew what to expect.  Our purchase numbers are based on the current rents, so there isn't a huge push to jack the rent up right away which is also what the tenants are worried about.

There is NO WAY I would buy a property without an inspection, by that point you (and likely others) have viewed the property so that cat is already out of the bag.  If they are around during the inspection and want to chat, I try to reassure them that we are identifying any issues that would need to be repaired so that we can provide them with an apartment in good repair.

Kelly

Kristen Ray · Answer

@Brian Karlow @Michele Fischer @Nathan G. @Fred Heller @Wesley W. @Austin Chambers @Ryan Murdock @Kelly N.

I would like to thank everyone for responding. It appears that the group overwhelming response was to generally have no tenants in place at closing.  Often times I see properties for sale with tenants in place. I often wonder the rationale for selling if everything is going well (rents are at market, tenants are paying on time, property is in good shape etc).  Someone once suggested that it is better to do a pocket listing vs putting the property on the market when tenants are there.  The rationale I was provided was so the tenants would not be immediately alerted that the property was for sale.  Moreover, I was also informed to not bother to inspect the property if tenants were there to lessen the odds of them moving.  I thought the advice was a little odd but as someone new to the business I thought I would see what more experienced investors thought.

Personally, I would prefer to have the property inspected to better gauge what I am purchasing. The individual that advised to purchase a rental with tenants without an inspection rationale was if something major is wrong with the property the tenants will let you know.  Again, I am new but investing several thousands of dollars into a property that has not been inspected is more of a risk than I am willing to handle. I have heard of several horror stories where the property had issues the tenants never reported.

Kelly N. · Answer

It depends.  We have always bought with tenants in place, however in one building two out of four units were vacant at closing.  It has worked out well for us, especially when we were starting out and nervous about finding tenants and having that rent money coming in.  In our city, rentals are supposed to be inspected every 2 years by the city, so MOST properties are in reasonable shape.  We've addressed minor maintenance issues that came up during inspection while the tenants were still in place, and saved the upgrades for when the unit is vacant.  Out of 5 purchases and 16 total apartments, only one group of tenants signed a new lease with us- we've found that most tenants are making other plans once the property is on the market.

That being said, we would like to purchase the next place vacant.  Dealing with 100+ year old houses and many questionable maintenance choices made by the various previous owners has made us just want to take the time to do address any issues before we have a tenant in place, and make any upgrades to get the higher rent off the bat.

Kelly

Austin Chambers · Answer

I like what other people have mentioned in this thread.  I have taken over a property with tenants who have been there for 20+ years and were about 300 under market rent, but really took pride in the property.  I worked with them because I could tell how well they took care of the property, and now they are back up to market and are some of my best tenants.  But on the same deal, another tenant I really had troubles with and they moved out within 2 months of me purchasing the property.  One factor that I would take into account as well is time of year.  If it is December, I would be much more likely to hold onto them through the winter until it gets to the spring time where units are easier to rent.  Hope this helps

Tenant or no tenant that is the question?

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