Should I buy a rental property that already has tenant? Risky?
Philadelphia, PA · Member since 2017 · 32 posts · 4 votes
Hi everyone, I am currently looking at buying a property to rent out. I was initially thinking of possibly getting a property that need renovation, fix it up, and then rent it out. However, while I was looking on Zillow. I found a property that is being sold at a fair price that was specified that there are already a tenant that will like to stay at the rental. The price is about $60k for the property, the property seems to be in good shape from the pictures. The only thing is that the tenant is paying $800, in which seems to be below average about 100-200$ according to rentometer.com. The only thing is that I am unsure of are: what might be the risk? It seems that even though it is below average rent pricing, the cost of the property compare to the payment of rental, it seem pretty good. Therefore, why will someone want to sell it? Is there a catch? Please help. Thank you.
I have purchased vacant and occupied properties. It seems like 50% of the time it is a problem and the other 50% is fine.
A couple of bits of info based on your post:
1. Rent-o-meter is sh!t. I would not based any significant decisions on that. You need to get real rent info by calling around and becoming familiar with the area you are investing in. Safest bet is to assume $800 is the actual going rate.
2. It is very possible that the tenant is crap. It is tough to think of why an owner would want to sell a property with a great tenant. That being said it does happen. It is also possible that the owner is selling because the deferred maintenance is piling up and he can't afford to cover it.
3. Obviously don't purchase based on the online photos. Get inside. Talk to the current tenant. Ask the tenant how well the current owner takes care of the property. Take the response with a grain of salt because tenants like to complain, but at least you will have some data.
4. Relative to my area the purchase price is a little high compared to rent, but I have absolutely made worse purchases. Without any other data but the price and rent it is probably worth digging in further.
@Edward Shen
Purchasing a rental with an existing Tenant can be great, if the Tenant is a good Tenant. Tenant turnover costs money, so as a rental owner you want to minimize Tenant turnover. However, evictions also cost money, so you definitely want to avoid having to evict whenever possible.
A few things to consider:
First, there could be a variety of reasons why the Seller is selling the property. Maybe they inherited it from a family member. Maybe they’re just retiring out of rental ownership. Maybe they just need the money for some life event. Maybe they are moving and don’t want manage long distance. Or, maybe there are issues with the property, Tenant, or whatever? You just don’t know and it could be a myriad of reasons that may or may not have anything to do with the property itself.. So...ask, and make sure it’s not an answer the gives you red flags about the property.
Regarding the Tenant and rental rate, you should inquire and find out all you can about the Tenant and why they are paying so much below market rent. It could simply be that they have lived there for 20 years or something, essentially take care of the place on their own, and the Owner just never increased their rent. Or it could be that they had some kind of relationship with the Owner and got a “friends and family discount”. Or it could be that the property actually is not as nice as it looks on Zillow, and thus really won’t command market rents. Again...ask and get answers that give you comfort and confidence. Especially because if you’re planning on increasing the rent, then you need to know if the existing Tenant can and will pay it, or if it will cause them to not renew and you’re now looking for a new Tenant.
Along these lines, you need to find out when the existing lease expires so that you can plan for what and when you will increase the rents.
Finally, get an inspection of the property as part of the purchase contingency. An inspection will cost you about $300-$600. Spend a few hundred sooner to save a few thousand later.