How to Handle Inherited Tenants: Reviewing Leases, Raising Rent & More

by | BiggerPockets.com

When you purchase a rental property, it may come with tenants in place, and those tenants will suddenly become YOUR tenants. These tenants are known as “inherited tenants.” Inherited tenants can be beneficial, as you will not need to immediately spend time filling the vacant unit, and you’ll be receiving income from day one. However, inherited tenants can also be risky, as they were not put in place by you, and you don’t have a clear indication of how well they were screened or what type of tenant they are.

Furthermore, they may have been poorly trained by the last owner and will need to be re-trained to follow your rules and way of doing business. Or maybe those tenants will be absolutely perfect, and you’ll be thankful to have them.

The truth is, you won’t really know for sure until you begin dealing with those tenants. However, there are a few things you can do to increase the chance of a successful acquisition of inherited tenants. But before we get to that, understand that legally, the leases go with the property, which means everything about the lease stays the same when you take over. For example, if you purchased a property and the existing tenant was three months into a one-year lease, you would be required to abide by the terms of their lease for the next nine months. Again, the leases go with the property.

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Review Existing Leases

Before closing on the property, you will definitely want to review the leases for each existing tenant to verify the income and what expenses are the tenant’s responsibility. Do they match the financials that the seller provided?

For example, let’s say you purchased a triplex and the seller claimed to get $500 per month, per unit. If the lease shows just $400 per unit, you have a problem. This is actually not as rare as you might think, as sellers like to talk about their opinion of “fair market rent” (what they think it COULD rent for) rather than what they are actually receiving. This is known as the “pro forma” rental income. If this is the case, start asking questions and be sure to run your numbers with accurate data, not pro forma numbers.

Related: 7 Types of Tenants That Are Harder to Insure (& What You Can Do About It)

Verification doesn’t end with comparing the leases to the financials. Leases can easily be altered or forged. Imagine purchasing a property, only to find out (after closing) that the lease was changed by a shady landlord. This kind of thing does happen, so you must verify the terms of the lease with each tenant before purchasing the property. This is done through an Estoppel Agreement.

An Estoppel Agreement is a simple, one-page form that the tenant fills out letting you know the terms of their lease to the best of THEIR knowledge. If the seller of the property will not let you speak with the tenants and get Estoppel Agreements, you might be dealing with a seller who is trying to hide something. If you do get the Estoppel Agreements signed and discrepancies are found, you’ll want to make sure they are cleared up before closing.

Sometimes it could be an honest mistake, sometimes a tenant might be lying to try to get lower rent, or sometimes the seller might be a liar. You don’t want to buy a property until you understand exactly what you are getting.

An Estoppel Agreement should contain at a minimum:

  • The tenants’ names and who resides in the unit
  • The lease term (including start date)
  • The rental amount due each month and the due date
  • The security deposit amount
  • Who pays which utilities
  • Who owns the appliances
  • Whether there are any pets in the property
  • Whether there are any problems or repairs needed
  • Whether there are any other agreements with the landlord

Make sure both you and the tenant sign this agreement, and keep it in their “tenant file.” This way, if a tenant tries to tell you later on that their deposit was actually $1,000 instead of the $500, you can back up your claim with their signature on the Estoppel Agreement. It’s hard to argue with that.

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Put Yourself in Their Shoes

When purchasing a property that has inherited tenants, keep in mind that they are likely aware of the sale and are concerned about the unknown. They probably have a lot of questions, like “Who is this new owner,” or “Are they going to kick us out,” or “Is my rent going to be raised?” This uncertainty for the tenant can lead to a frustrating start to your relationship, so put yourself in their shoes and try to make the process as easy as possible on them.

We like to send a letter to the tenant on the day we take over a property, introducing ourselves and the company, letting them know we are the new owners and will be responsible for taking all phone calls, maintenance requests, lease-related questions, and anything else involving their tenancy. In this letter we like to let the tenants know about some of the improvements that will be taking place at the property in the coming months. This can help reassure the tenant that you are not a slumlord, but someone who takes pride in your work.

Related: What to Do as Soon as You Deny or Approve a Prospective Tenant

Raising the Rent on Inherited Tenants

Perhaps you purchase a property with existing tenants and you know that the rents are far too low. This is common, as many landlords are reluctant to raise the rent even as the market rate climbs, leaving long-term tenants with leases far below market rent. When we purchased our 24-unit apartment complex, this was the case. Most units were renting for $475 per month, when the market rent was a full $50 per month higher than that at that time. All the tenants were on month-to-month agreements, so we could raise the rent with just a 30-day notice.

But should we? Do we tear the band-aid off right at the get-go in one swoop, or do we raise the rent slowly or only on a few units? If we suddenly raised the rent on all the tenants, it’s likely many of the tenants would move, and we’d be left with a lot of units that needed to be rehabbed and very little income coming in to help with those expenses. On the other hand, if we let the tenants stay at that $50 per month difference, that is thousands of dollars in potential rent we would not be receiving each year.

There isn’t always a clear-cut answer on whether or not you should raise rent. We personally didn’t have a lot of capital to handle that storm so we opted to keep the rent the same for most of the tenants for the first year, only raising the rent as we fixed up units and moved new tenants in. Another investor, someone with a lot more capital, may have decided to raise everyone’s rent and accept the immediate loss, choosing instead to rehab multiple units and get new tenants in quickly. It’s a balancing act and something only you can decide.

Have you dealt with inherited tenants before?

Let us know about your experience with a comment!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

14 Comments

  1. Joel Owens

    Estoppel needs to be notarized with signature by tenants authorized on the lease. Tenants can claim they never signed it etc. or the copy shown to them is not what they signed etc.

    Also some leases are not generally enforceable. An example is if someone is getting foreclosed and right before then a former owner, friend, family gets a long term lease signed at way below market rents. The new owner could argue that was a sweetheart lease and should not be enforceable.

  2. Gary Piatt

    Great advice, thanks. I had noticed several properties here that said they were already rented so this is helpful.
    We are just getting started in your former town in Wa. and hope to make our first purchase very soon.

  3. Jennifer McElliott

    Thanks for a great article – this has always been such a gray area for us and I never had heard of the Estoppel Agreement before – so that will definitely come in handy for the future! One other gray area/question I had w/ a tenant who was on a lease that still had a few months left on it was – 1.) do we honor the terms of her old lease on a newly signed lease with us or 2.) do we just keep the existing lease that they signed, and it’s understood that the terms are still valid and applicable, only it’s now with us and not the previous owner? In our case this last May, I just had her sign a new lease w/ us honoring her current rental rate until it came time for renewal, at such time the rent rate increased to the new rate.

  4. Joe Gieringer

    Great Article Brandon! I recently purchased a 28 unit apartment building that was fully occupied and well under market rent. Something I’m have success with is targeted rent raises. Each month I’m choosing several units to raise rent on instead of all at once. This way I can prepared for potential vacancies, time rehabs and mitigate risk of a mass exodus. So far all has gone to plan and by years end I’ll have capture rent increases desired.

  5. Joann Gasper

    A good article. While inherited tenants can be a problem, we had a very good experience. We purchased a 4-plex a couple of years ago using a 1031 Exchange. The units were fully rented at purchase. As soon as the title had transferred, I left a gift basket and a letter of introduction at each unit. (I made the gift baskets myself for a cost of about $50.)

    At purchase, we had one problem tenant who did not pay on time. I was able to negotiate an early lease termination with him. It was a win-win. He was able to find a place that he could afford, and I was able to get a good tenant.

    The remainder of the tenants were good. I kept the original rates on their first renewal. At their second renewal, the rent was raised slightly (about 1%). New tenants had at least of at least 13% increase which still left the units slightly below market.

    Renting slightly below market provides me with a larger pool of applicants. This allows me to carefully choose a new tenant and results in a lower vacancy rate. Even at the lower than market rental rates, our cap rate is still over 8.

  6. Kyle Bender

    Question. I’m looking at purchasing a small multifamily unit property in my area. I have noticed many of them have tenants that are not paying utilities. The landlord is paying them. I would like the tenant to pay utilities, so do I have to wait until the lease is up to change the lease for the tenants to pay the utilities?
    If I’m paying for heat that will be a large expense during the winter for me.

    • Katie Rogers

      The landlord is probably “paying” for utilities on the same as the the landlord is paying the property tax and insurance. In other words, the utilities have probably been averaged over the year and bundled into the rent. The tenants cannot pay the utilities unless the units are separately metered. If you charge more “for utilities,” you have raised the rent. You cannot do this until the term of the lease is over. Then either you can raise the rent. Whether you attribute the rent increase to utilities is pretty much irrelevant to the tenant. Or at the end of the lease term, you can have the units separately metered and let the tenants pay for their own utilities. Most landlords do this only with gas and electricity. Usually water, sewer and trash stay bundled in the rent.

      • Ryan Mayes

        Do not bundle water in with rent! If they fail to pay the water bill and it’s under your name,you have to pay it, if not then your liable to find tenant a new place to live and can be sued as you can’t shut it off on them and if you fail to pay, even though they owe it still falls on you for not paying it then charging them.
        If the water is under tenants name, most counties will shut off there water AND evict them (pull the CofO) and then they basically get rid of bad tenant for you. Huge difference and well worth it to have the town be the “bad guy” demanding payment and not me

        • Katie Rogers

          Normally there is only one water meter for all the units. This is why the water is bundled with the rent. Having the tenants pay their own water, sewer and trash usually works only if you are renting single family housing that has all its own meters.

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