A vacant rental property is one of the costliest parts of being a landlord – so does purchasing a rental property that comes with tenants make sense?
Buying a property that’s already occupied comes with a host of benefits and potential drawbacks, so we’ll walk you through everything you need to consider – from the state of the property itself to the existing lease agreements.
Before we break down everything you need to know, let’s take a moment to review what you should do before finalizing the sale.
Before Buying Occupied Rental Property
Never go into a significant purchase without doing your homework! Reading this article is a good starting point, but you should also ask the seller:
- What term length is listed on the existing lease?
- Have any tenants prepaid for rent? If so, who and by how much?
- When was the last time the property was inspected?
- Are there any existing complaints regarding the tenants, their behavior, or their timeliness in paying rent?
- Can I review a copy of the signed lease agreement?
- Who currently handles maintenance issues (electrical vs. plumbing vs. emergency, etc.)?
- When can I schedule a home inspection?
If you feel comfortable with the answers to these questions, you can feel more confident moving forward with the rental property purchase.
What Happens With the Existing Lease?
Rental lease agreements bind the landlord and tenant(s) to the property itself. In other words, your newly inherited tenant has to follow the terms outlined in their signed lease agreement until the contract ends – as do you. If possible, read over the lease agreement before purchasing the property to fully understand the duties you’re taking on, especially the ones related to utility bills and exterior maintenance (e.g., shoveling snow).
Bear in mind that you can’t:
- Immediately evict the tenant(s)
- Raise the rent
- Change the lease terms automatically
The existing tenant holds all the rights granted to them in the original lease. If they have a month-to-month lease and you’re looking to charge more, you must provide proper notice as your local landlord-tenant laws dictate. The same can be achieved for a long-term lease, though you may have to wait for the appropriate notice period.
It’s possible that the current lease agreement has language that ends tenancy if the property is sold, but you’ll need to verify that by reviewing the lease agreement(s). If you’re really keen to empty the premises, consider extending a cash-for-keys offer to your inherited tenants.
You may also be wondering about what kind of due diligence the current landlord has performed. With current status of rental application fraud you’ll want to verify. Make sure that:
- Credit scores were obtained from independent sources
- Employment verification was performed
- Rental history was verified
Pro Tip:Whether you’re buying your first rental property or your 27th, it’s crucial to understand the landlord-tenant laws in your area. For example, a rent-controlled property may require additional notice or a different procedure to end a tenancy, depending on your state. Remember, not knowing the law doesn’t excuse breaking it!
Your Obligations as a Landlord
If you’re an experienced landlord, the responsibilities you owe to your new tenants won’t come as a surprise – but let’s rehash what you owe your renters beyond the lease terms.
Rocket Mortgage lists seven of the most common landlord obligations, which include:
- “Complying with all state and local landlord-tenant laws, health codes, and building codes
- Maintaining a safe and habitable property for your tenants
- Maintaining the HVAC system, electrical, plumbing, etc.
- Ensuring the water heater works and that tenants have access to running water and heat
- Keeping the property free of environmental toxins such as asbestos, lead-based paint, and pests
- Maintaining the structural integrity of the building
- Responding to any repairs in a prompt manner”
When in doubt, remember that your role as a landlord is to provide safe housing for your tenants. That responsibility carries over even if you weren’t the tenant’s original landlord, meaning you could be held liable for anything that isn’t up to code.
That’s why it’s crucial to schedule a professional home inspection before purchasing the property. If the purchasing contract has not closed, then the current landlord would be the one to contact their tenant for a house inspection. They must adhere to the laws of the state on prior notice – which is usually 24-48 hours prior to the inspection.
