Investing in rental properties often means inheriting existing tenants. Inherited tenants bring both positive and negative attributes to the transaction.
What to do with Inherited Tenants:
What you as the new owner do with inherited tenants most likely depends on two things:
- The terms of the tenant’s lease, and
- Your plans for the property.
First, you as the buyer need to be aware that a transfer of ownership does not void a tenant’s lease. If your inherited tenant is in the second month of a 12 month lease, you have to honor those terms and allow them to continue to reside at the property for 10 more months at their current rental rate.
If for some reason you want this tenant to leave the property you will likely have to buy them out. Does that mean you have to offer them the entire amount left on their lease? Perhaps. But it is much more likely that you may be able to make some kind of deal. However if the tenant does not wish to leave, you are likely stuck with that tenant.
Secondly, you as the new buyer may want to rehab the property, or increase the rents and thus increase the value. Or the property could be in a satisfactory condition and you could also just be looking to let things ride as they are.
If you wish to rehab the property, and if the terms of their leases allow it, it would be best if the tenants were out of the way. But, you still can’t just ask them to leave the day after you close. You must give the tenant proper notice.
The same holds true for any potential rent increases. You as the new owner cannot simply impose new rents without proper notice.
So what is proper notice? That will vary depending on the existing lease and your local laws. A good rule of thumb is to generally give at least a 30 day notice. I try to give a little more to be courteous.
If you want to just let things ride along as they are then really all you need to do is to introduce yourself to your new tenants and provide them with your contact information and where the rent should be paid.
With inherited tenants, the upside is that you instantly have cashflow (I hope!). But, you also have tenants that have not been through your screening and approval process. You have to weigh the potential risks there.
No matter what you plans for a property purchase, when deal with inheriting tenants always use an estoppel agreement. It will protect both you and the tenant should a problem arise. And in this business, problems can arise very easily.
Have you ever inherited a tenant? What did you do?
Be sure to leave your comments below!