Buying w/ tenants already in house?

Question

Hey BiggerPockets Family!

I have a question about buying houses with tenants already in the house. I have an opportunity to buy a couple single family properties from an investor looking to sell. This investor currently has tenants in the properties but the rent he is charging is super low for the area. The tenants are month to month. Everything looks good on the properties if I can double the current rent.

What do I need to do to assure that I can get the rent I need to purchase these properties? Do I need to give a certain amount of time for the tenants to move out after purchase if they will not agree to the new terms? Can I even get them out of the property if they are on a month to month lease right now with it being winter in Wisconsin and COVID?

This is the first time I am dealing with a property that has tenants already so any help and guidance would be helpful! Thanks!

Julie Hartman · Answer

If you really think you can get double the rent, I would buy them contingent upon the seller turning them over vacant. You will have a difficult time removing tenants during the eviction moratorium especially if they are abiding by the lease terms. Let the seller serve non-renewal notices and deal with getting them out for you.

George Mastrosavas · Answer

It’s important to understand that a property sale does not change the terms of tenant leases. Just like easements (and other covenants) that “run with the land” – meaning, they are tied to the land and not the owner – leases stay “attached” to the house, even when ownership switches hands. The takeaway: The lease that’s in place before you buy the property remains in effect even after you close on it, so you cannot legally raise the rent, modify the clauses or agreements or kick a tenant out before the end of a lease term just because you’re the new owner.

If you definitely want the tenants to move out, you have a couple of options. One is to submit an offer on the house that is contingent on the home being vacant (that is, no tenants) when you close. This puts the burden on the seller to either break the lease or offers an incentive to the tenants to leave early. If the seller is unable (or unwilling) to do this, you can walk away and start looking for another house. The other option is to buy the property and then break the lease(s), renegotiate the terms or “buy out” the tenant(s) yourself. But in this scenario, keep in mind that a tenant is under no obligation to accept any new terms if they have a valid lease in place – and you could open yourself up to a lawsuit if you break the lease or try to force an eviction. Hope this helps!

Rolly Weaver · Answer

Matt,

Purchasing properties with tenants has a bad reputation on here, but, in my experience isn't that terrible.

In my experience, once you purchase, the bad apples will leave. Once those tenants leave, that will give you time to repair and raise rents on the vacant units, And you will receive payment on the occupied units.

Otherwise, if you were to receive the units vacant, you'll have the stress of repairing the units and finding good tenants, and because of the time/money crunch, might be pressured into choosing a poor tenant. (Ask me how I know).

Matt Amundson · Answer

I appreciate the input from all three of you!

@Jon Kessler Thank you for the link! I will read through it right away!

Peter Falk · Answer

Matt, you can ask to review the current leases to make sure no unique clauses, but if a typical month to month lease, the 28 day notice prior to the next rent paying month works. This would not be an eviction, just the landlord opting to end the lease with property notice (works both ways as tenant can end with property notice to landlord anytime they want), so I can't think of anything the tenant could argue against. I'm also pretty sure WI covid ban on eviction action for non payment ended in May, 2020 and there is no statute prohibiting evictions in the winter (aside from the unique temporary covid ban). In your Offer you could ask for the right to market the property For Rent at the higher rents and see if you get any good applicants. If the current tenants are good, could also ask if they have an interest in the higher rents and end their lease with proper notice and sign your new lease with them.

Jon K. · Answer

When you say what do you need to do to ensure you can get the rent you need, are you asking how to determine fair market rent? Or are you asking how to increase the existing tenant's rent to the new amount?

If the former, my favorite way is to ask other landlords that own similar properties in the area. After that, sites like zillow or rentometer do a decent (but not perfect) job. An agent can sometimes pull rental numbers from the MLS too.

If the latter, a quick google shows that Wisconsin has no rent control and you can raise the rent of a month to month tenant with 28 days notice in normal times. I barely skimmed this thing so trust but verify: https://datcp.wi.gov/Documents...

That being said, I know a lot of locations have frozen rent increases due to the pandemic so you'll have to dig in to that. You may want to re-post this in your area's specific BP forum to get local advice.

As for getting them out (read the document from the same link from above), you of course have to check the WI/local laws again on the matter but evicting a tenant due to them refusing to leave after the end of the lease is different than evicting a tenant due to non-payment due to covid. That's a heavy handed and lengthy/expensive process regardless and you may find it easier to just talk to them about it and consider either offering them cash for keys or working out gradual increases to get them back to market rates.

At the end of the day, it's your investment and your business. Hope some of that helped.

Buying w/ tenants already in house?

Buying w/ tenants already in house?

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