Buying a rental with a tenant in place - thoughts?

Question

I've seen a decent amount of properties that are for sale that are already tenant occupied. I would like to hear experienced people's thoughts on this situation, so what do you all think? I've heard some beautiful stories and some horror stories

Richard F. · Answer

When acquiring an occupied unit, always request, in the purchase offer, copies of current rental agreements, current rent roll, current delinquency report, Security Deposits held, and confirm if there are, or are not, any subsidized (S8) Tenants. Sellers will need to notify S8 of change in ownership and the effective date in advance so they will hold payment and pro-rate appropriately based on actual closing date. Any rents paid to Seller can be very difficult for S8 to get back, and equally so for you to collect. You also need to notify S8 of your new Ownership and submit the appropriate form for approval before they will send ANY rent to you. Security Deposits must be transferred to buyer at closing, without deductions. (If not equal to current monthly rent, determine why?)

Once your offer is accepted and contingencies cleared, provide the Seller with basic contact info for them to provide to all of their Tenants as a brief introduction. Once they have done so, and closing is imminent, you can then send the Tenants your own letter of introduction with further details for service requests, how and where rent payments are made, and instructions to contact you for scheduling a walk through inspection of their unit, with a deadline for doing so.

After closing the transaction, at the scheduled inspection, you need to thoroughly inspect every room, every closet, every sink base cabinet and other storage areas looking for any signs of water intrusion that you will need to more fully investigate later. You are also looking for signs of various pests, safety issues, deferred maintenance, and general housekeeping. Once you have inspected, spend time with the Tenants confirming (by asking, not telling) what their current rent and Security Deposit are; what utils are they paying; what appliances are theirs; what previous maintenance requests were not completed; and, for multi-fam properties, what vehicles are theirs and where do they park? Be sure to note any vehicles obviously inoperative, or having expired/missing tags.

Ask what their future plans are...do they plan to move in the summer, or first of the year, or, are they happy and plan to stay long term if possible? Do not discuss rent or anticipated renos at this point. Simply advise them you need to study the market, evaluate your findings from all of the inspections as well as the market, and then make decisions and make offers to approved residents. CRITICAL: Provide them a Rental Application for ALL adults to complete in full (I never charged for applications of existing Tenants) and return to your office with a deadline. NOTE- you must follow the existing terms of any valid, written, agreement, although you can change Where and to Whom they make rent payments to. That agreement cannot be terminated prior to the stated end date, but that does not preclude you from informing them you WILL absolutely be terminating the prior agreement at it's stated end date, regardless if they plan to stay or move, so their terms will be updated and consistent with your standard practices.

Only when you have all of the data, including a full current background check, and have developed a potential project plan should you send them either a Notice of Termination (effective at least the minimum required notice period per Local Law, or 60 to 90 days with the promise of 100% Security Deposit return and rent pro-rated to last day of occupancy based on return of keys IF unit is left broom cleaned with all rubbish and personal property removed from the unit and from the exterior/curb) OR a Letter detailing the terms you are offering and providing a copy of your new Rental Agreement and related Policies, with instructions to schedule a meeting to review and sign, again with a deadline to do so.

Then meet, review page by page the critical sections and terms, all additional documents, policies such as either allowing Pets, or No Pets with a separate Assistance Animal Policy; House Rules for multi-fam properties; parking rules; Procedures and pick up days for routine rubbish; Move Out Cleaning Guidelines; Lead Based Paint form and booklet; Info on Mold and cleanup; and anything else relevant to the property or Local Law.

Now just be sure that you also follow all of the terms of the agreement, by being consistent with late charges, service call responses, rules enforcement, and other Owner responsibilities.

Jimmy Lieu · Answer

Welcome to BP! I've bought several tenant-occupied properties over the years, and I'd say they're neither good nor bad by default. It really comes down to the quality of the tenant and the paperwork. I'd want to review the lease, payment history, security deposit records, and make sure the rent is actually being collected consistently. If the tenant has been paying on time, is taking care of the property, and the rent is close to market, that can be a huge plus because you have income starting on day one. On the other hand, if the tenant is behind on rent, paying well below market, or there's no solid documentation, I'd underwrite it as if I might need to replace the tenant. I've had smooth transitions where nothing changed except who collected the rent, and I've also walked away from deals because the lease and tenant situation created too much uncertainty. The key is doing your due diligence before closing so there aren't any surprises afterward. Happy to connect and answer any questions you have!

Drew Sygit · Answer

Challenges of buying tenant occupied:

1) How well was the tenant screened?

2) How is their payment history?- If a PMC involved: you can probably get a Rent Ledger- If a DIY landlord: you're lucky if you get a spreadsheet Rent Ledger - which I'd be suspicious of. What bank statements showing rent deposits can the seller share?

3) What the history of their maintenance requests?- Are they abusing the property or "needy"?

4) How needy or abrasive is the tenant in general?- A tenant that is constantly a pain to deal with is NOT a good tenant, even if they pay rent on time.

5) What side deals does the seller have with the tenant?

When you take over, recommend sending a Questionnaire to tenant to confirm terms of the lease and inquire about deferred maintenance issues.

Now, don't misunderstand, these are just concerns and may only be an issue 20% of the time (or less).

To cover some of them you can require the seller to sign reps & warrants at closing, making them personally liable for any misrepresentations.

Also, it is VERY COMMON that you won't be able to tour a tenant-occupied property until your inspection.
- Tenants do NOT want dozens of potential buyers intruding on their HOME and disrupting their lives.

John Morgan · Answer

I've bought 35 SFR with tenants in place. They have all been great except for one I had to kick out after 3 years. I tell them all when I first buy the house they are welcome to stay forever. I value low turnovers so I treat my tenants great and keep them in for cheap. This keeps it simple and easy to self manage, and I rarely have turnovers which saves me a lot of money. So don't rule it out!

Matthew Crivelli · Answer

Inspect the unit and to see how the tenant is living, that alone will give you insight. Also ask for proof of rent payments for the last 6-12 months. Like Brian said, it can go either way.

G. Brian Davis · Answer

It can go either way. A good tenant with a solid payment history can be a real advantage. On the other hand, inherited problem tenants can become your problem too. I'd spend time reviewing the leases, payment history, and lease terms before deciding. That's usually where you'll learn the most.

Buying a rental with a tenant in place - thoughts?

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