Buying an SFR and Allowing Tenant to Remain in Property

[Joseph Hernandez]

Hi. Would you purchase a SFR, that's a fixer and allow the tennent to occupy the property for 3 years? If so, what would be your terms?

[Andrew Postell]

@Joseph Hernandez ok, the whole point to this is that we are purchasing a rental property and increasing the value so we can increase the rents.  When we do this, we then have immediate equity in a property by using a small amount of money to execute.  If I purchase a property that needs work...but don't improve it...then I'm really paying the current market value on a home.  And that really means I'm OVERPAYING for a property because I'm buying a property at the purchase price AND closing costs are included.

If I cannot rehab the property, that means that I cannot get insurance.  I also cannot get financing.  So, now I have to execute in all CASH to get buy a property.  That's double-whammy.  Now I'm taking all my working capital and leaving it in an asset that will not be improved for 3 years.  It's just dead money at that point.

And the third piece here is that there are some legal precedents (depending on your state) where if you don't remove the current tenants from the property then they can continue to claim domain on the property for an unknown period of time.  They could (again, depending on jurisdiction) cry "foul" and say you took advantage of them and leads to all sorts of messy things.  Once you remove them from the property, then the property dominion laws are reset.  What if they continue to stay in the property for longer than you want?  You might be very surprised by how much leverage a previous owner can use here.  It's annoying enough just removing a tenant with an expired lease.  Try it when they were the owners too.  Maybe they will move...but the other two issues above are just as equally important when investing.

Hope all of that makes sense.