Buying a property with tenants: Inheriting cashflow or problems?
Rental Property Investor · Accokeek, MD · Member since 2020 · 106 posts · 87 votes
Stepping up my game to multifamily…
This 6 unit is rented in a decent area and has 5 rented and the owner occupying the 6th.
Here’s my objective. Buy the property with a conventional investment loan. Fix up the 6th unit and rent it closer to market rents. After different turnover, I’d like to do the same to the following units to raise the cashflow situation and commercially refi the property.
But as a new-ish landlord, what should I consider when inheriting tenants? Should I ditch them with cash for keys or celebrate that the property is already cash flowing?
Also, any tips when you purchasing a 6 unit built in 1973?
Thanks BP family!
@Zachary McDonough Please be sure to know your market. There is a town about 45 minutes from me that was a mill town. The mill shut down and there were no jobs. The government built a federal prison which is now the largest employer. There are maybe 700 renters in this town of 1800.
All of a sudden with the market explosion all of the slum lords have put their apartment buildings, mostly large houses carved into 2-5 units on the market at prices that I find ridiculous for what you are getting.
Investors from the south and OOS have “discovered” the area and are buying the properties with the intention of BRRRRing them. The only problem is that the renters can not afford rent at even $200 more a month than what they pay the slum lords. These investors are going to buy high, invest $75-100,000 per building expecting $1400 a month rent only to find there is no one to rent from them.
If the locals had $1400 they would have moved long ago.
Sometimes inherited tenants are excellent tenants. I have 10 doors and 10 inherited tenants. Making great money with no problems.
@Zachary McDonough big thing to consider when dealing with inherited tenants is the previous owner/manager and the lease signed with the tenants.
Try to get an idea if the current owner screened tenants properly. Make sure to get copies of all leases and any other agreements with tenants at closing. Look through the lease (hopefully there is a lease) that they signed with the previous owner, if the lease seems to be decent and everything is documented like it should be (security deposit, move in checklist, etc) there is a better chance if the tenants are better quality.
If you have a decent relationship with the seller, ask about the tenants and see if you can get an idea of the quality of tenants (take whatever the owner says with a grain of salt). Ideally you should get a year to date (and previous year) rent roll to see if tenants are late on rent or have been paying late. If there is a local caretaker or maintenance person, talk to this person about the tenants. During your walk through of the property you should be able to get an idea of the tenant based on the condition of each apartment, dirty, damages, etc.
At the end of the day it can be challenging choice to make on keeping the current vs not. If tenants seem to keep decent care of their apartment, have historically been paying rent, and rents are at or close to market value, I would generally keep the tenants.
If you do keep tenants, get them on your lease as soon as you can and start enforcing your rules. Immediately correct any maintenance issues in their apartments to show them that you are a quality owner that cares about their quality of living. Most tenants are happy if you show them that you care about them and their apartments. Get rid of any bad tenants right away, the good tenants will appreciate this and will want to stay.
Training poor inherited tenants can however be challenging if the previous owner did a poor job of enforcing the lease, often it is easier to start with new tenants from scratch. Trust your gut on this decision, often times it will be correct.
@Zachary McDonough Please be sure to know your market. There is a town about 45 minutes from me that was a mill town. The mill shut down and there were no jobs. The government built a federal prison which is now the largest employer. There are maybe 700 renters in this town of 1800.
All of a sudden with the market explosion all of the slum lords have put their apartment buildings, mostly large houses carved into 2-5 units on the market at prices that I find ridiculous for what you are getting.
Investors from the south and OOS have “discovered” the area and are buying the properties with the intention of BRRRRing them. The only problem is that the renters can not afford rent at even $200 more a month than what they pay the slum lords. These investors are going to buy high, invest $75-100,000 per building expecting $1400 a month rent only to find there is no one to rent from them.
If the locals had $1400 they would have moved long ago.
Sometimes inherited tenants are excellent tenants. I have 10 doors and 10 inherited tenants. Making great money with no problems.