Purchasing a rental property with current tenants isn’t just convenient—it’s a valuable opportunity. The ability to bypass renovations, advertising, and tenant screening is just one of many benefits. But it’s crucial to recognize that acquiring a rental property with existing tenants can also come with certain challenges. To take full advantage of this opportunity, it’s important to educate yourself about the process and potential pitfalls.
Conducting Due Diligence
The instant income and convenience of buying a leased property might make it seem like the ideal option for your next investment. However, don’t automatically assume that a leased property is in good shape or that the tenants are responsible and pay rent promptly. Rather than assuming, conduct careful due diligence to ensure that the leased property is a good investment.
One of the first things to review when evaluating a leased property is the current lease agreement. When purchasing a property with tenants, you inherit the lease agreement they signed with the previous landlord.
Since the lease is a binding agreement, you’ll need to be willing to honor its terms until it ends or comes up for renewal. There are instances when the tenant has agreed to end the lease once the property is sold, but this is not typical. Usually, you’ll need to be familiar with the previous agreements that will govern your new investment.
Assess tenant payment history and lease terms
In addition to reviewing the existing lease, it’s crucial to carefully screen the current tenants before acquiring the property. Treat the screening as if the tenants were new applicants by running background and credit checks, and verifying their payment history and references.
Also, check with the current landlord or owner to ensure that the tenant’s security deposit has been paid and is held in a separate account.
Inspecting the property with tenants in place
Along with screening tenants, it’s necessary to carry out a full inspection of the property. To properly assess the current condition of the property, an in-person inspection of the house and yard is necessary.
Since tenants are already occupying the property, it’s important to be cautious and find out how diligent they are in keeping it clean and well-maintained. It’s also important to ask the current owner about any recent or past insurance claims, especially if they were caused by the tenants. If there are too many insurance claims, it might be challenging to insure the property after the purchase.
If all the details are in order, you could have found an ideal tenant-occupied rental property. Regardless of whether your new property has tenants, you’ll need to maintain it in livable condition, make sure the electrical and plumbing systems are in working order, and confirm the structural integrity of the building. Even though your new rental may already have tenants, once the sale is final, you are entirely responsible for the management and maintenance of the property.
Managing a property requires a lot of work, especially if you’re doing it on your own. Let the team at Real Property Management Vesta take over the day-to-day tasks for you. For more information about our property management services in Forsyth and nearby, contact us today or at 478-257-7055.
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