Bought a house with a tenant in it.

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Hey guys!

Very excited to have purchased my first investment house!!

The numbers made sense. It came with tenants that I met. They are currently living there until next Novemeber and hopefully longer.

How does that work with the current lease?

Do I have them sign a new lease or do we all just initial the current lease?

How do I make sure the water and electric bill are all in their names?

Can they put it in their names?

Any common mistakes I could avoid would be greatly appreciated!

Thanks for all your help!

SOOOOO Excited I finally pulled the trigger!

@Mitchell Litam , the existing lease runs with the property until it ends, however make sure to read your state's landlord tenant laws, so you know how you can make changes once it comes up for renewal, how much notice you have to give them, etc.

Water/electric bills in their names is a matter for their current lease and your utility company's policies. Some utility companies do not allow the utilities to be put in the name of anyone other than the homeowner. 

Some common mistakes to avoid:

1. Did you get their security deposit transferred to you at closing? Make sure to deposit it into an account that complies with your state laws. (Some states require that you pay interest on the deposit, some require that it be kept separate from any other funds, etc.) 

2. Did you get a Tenant Estoppel Statement before closing? This is an account of the terms of their rental agreement with the landlord. The lease might say $1,000/mo rent, due on the first, but they had a verbal agreement to pay on the 14th, and only $750. 

3. Have you introduced yourself to them and given them a new place to pay rent? Absolutely do this now.

4. Ask them for any repairs that may need to be done on the home. Not requests for things they want, but a list of broken or damaged items that need repair or replacement.

5. Did your seller provide a move-in sheet, that details the condition of the home when they moved in? If not, you need to go over now and take notes about what the property looks like. This current condition is the only one you can charge for when they go to move out. 

But landlord tenant laws are the most important thing. Read them.

@Mitchell Litam , you can enter into a new lease if both you and the tenant agree to it. Chances are, however, that tenants will only agree to it if it benefits them (reduction in rent, extension of the lease term at the same rent, etc.). BIGGEST thing to remember is THESE ARE NOT YOUR FRIENDS! Give them an inch they will take a mile. They may try you on the first month of your ownership by paying rent late or coming up with an excuse. Don't accept ANY excuse for late rent. Serve that 5-day on the 5th day.

@Mindy Jensen I am reading through an Tenant Estoppel Certificate.

This may be a dumb questions but this is signed between me and the new tenants correct?

Not between me and the person I am buying from?

A section from this certificate confuses me a little.

"That there are no unpaid or outstanding claims, bills or invoices for any labor performed upon or materials furnished to either the Tenant or Premises for which any lien or encumbrance including, without limitation, materialmen, suppliers and mechanic's liens, have been asserted or may be asserted against either the Tenant or Premises."

Is there a generic TEC available to pro members from the Bigger Pockets documents? There wasn't one in the Ohio packet.

Thanks so much for all your help and answers!

The Estoppel statement is the seller and tenants, confirming the amount of rent paid, any concessions, etc. The tenants sign the statement. You get estoppel statements so the tenant doesn't come to you the first month that rent is due and say "The seller told me I can have $200 off rent every month to mow the lawn." or "The seller said my rent was due on the 15th of the month."

Originally posted by @Mitchell Litam :

@Mindy Jensen

Im sorry you said seller and tenants or did you mean me as the buyer and the tenants

 An estoppel is signed by seller and tenant before closing. This is your verification that nothing has changed (via verbal agreement or otherwise) since lease signing. For example, maybe one month tenant did not have money for rent, so seller used security deposit instead. In this case you would expect to receive a deposit from the seller at closing, but he wont give you anything. The estoppel would protect you in that scenario.

Congrats on making your first move! 

In addition to what's been said, you should get a good lease put together with any updates you want to see in it. You have to assume their current lease until it expires, but you can approach them after closing and see if they would want to sign on a new updated lease. You want to have all your leases expire in Spring rather than November, and they probably would feel more comfortable with that as well if you're going to do yearly renewals. 

As for the bills, you can call the utility companies for gas and electric to verify that they're in good standing. But those bills will never fall on you if they default. However, water/sewer/garbage are billed to the owner and you can bill the tenant, but it's ultimately your responsibility. 

I made plenty of newbie mistakes when I started buying in CLE two years ago, so feel free to reach out if you want to learn what not to do! hah

@Andrew B. That makes sense now. I was originally looking at it as myself and the tenant but that would not make sense at all haha I was just overthinking it.

@Ryan Evans Thank you! The lease was pretty air tight. They used a property management company that I will not continue to use. She complained that they were not getting back to them in terms of the things that they wanted to do. They wouldn't even let them hang curtains, so this should be an easy transition. I just got the house inspected yesterday so hopefully it all works out. Its on the west side of W 117th on a nicer quiet street. How many houses do you have in CLE?

@Mitchell Litam Everyone gave some great advice - I know I'm slightly late to the party, but congrats on finally pulling the trigger! Did the previous landlord do a background check and tenant screening? If you are making the sign a lease you could quickly run a background check and credit report - it doesn't hurt! Other than that, it sounds like you are on the right track!

Did you also account for property management when you ran your numbers?  I would always add at least 10% for property management in with my numbers on every deal, ask several top realtors in the area, who they would recommend for property management.  Then call each of these property managers on your list and vet them, even if you plan on managing this rental yourself.  At some point you might have a need for property management.  

Originally posted by @Mitchell Litam :

@Andrew B. That makes sense now. I was originally looking at it as myself and the tenant but that would not make sense at all haha I was just overthinking it.

@Ryan Evans Thank you! The lease was pretty air tight. They used a property management company that I will not continue to use. She complained that they were not getting back to them in terms of the things that they wanted to do. They wouldn't even let them hang curtains, so this should be an easy transition. I just got the house inspected yesterday so hopefully it all works out. Its on the west side of W 117th on a nicer quiet street. How many houses do you have in CLE?

That's great you've got a solid lease off the bat. The bar for PMs in the area seems so low that tenants will love you for even the most minor things. I've gained a tremendous amount of loyalty by just going in and making a couple of basic upgrades to set a good first impression with inherited tenants. And I've got 3 duplexes and am under contract on my second house in CLE, but I'm just investing over near Euclid so far. 

@Taylor Roeling Funny you say that. The property management company did a background check on them. I have asked for it multiple times and nothing. By asking for it I meant I asked my realtor to ask them for it. Thanks for your comment!

@Toby Mims Yes after watching a million webinars with Brandon I always account for prop management even if I am not using them at this moment hah

@Ryan Evans Yes the PM company sounds terrible. I love the Euclid area. It seems to make so much sense. However, I grew up a west sider and you know how Clevelanders are. I would invest on the East side but dont want to get my passport stamped. haha

@Mitchell Litam haha yeah I became an east sider by accident when I didn't know what I was doing and now there's no going back, so I guess I'll just have to stick it out over here indefinitely!v 

@Ryan Evans @Mindy Jensen While I have you guys.

What are your thoughts on opening an LLC for this house?

As long as I keep everything separated that should protect my personal assets from litigation correct?

Or is there something I should be doing instead?

I own the Duplex I am currently house hacking under my name alone and wasn't sure what to do with that either.

Thoughts?

From my understanding, the benefits of having an LLC are going to come into play most often for structuring partnership deals and litigation arising from issues on the property. Having a good amount of liability insurance for your landlord insurance policy (not just homeowners!) is vital. I actually bump up coverage far more than needed. But if an issue arises where you're going to get sued, they will go after the most money. Unless you have a significant net worth beyond the coverage of an insurance policy, they'll go for the insurance payout over your personal assets. All the people I've asked have told me that it won't really be necessary to go the LLC route until I own maybe 10 or more properties. Though, that depends on the value as well I suppose.

I think early on, the LLC debate is one with no real right or wrong answer, it's just a different approach depending on who you ask.

Do you have a mortgage on this property? If so, an LLC isn't the best choice. Your loan comes with a Due on Sale clause, which can be triggered if you change ownership from your personal name to an LLC. There is a debate on the site if this actually happens, but it can so you should be aware of it.