There’s no doubt that good tenants are worth their weight in gold.
So, it goes without saying that finding a property already occupied by a dependable, trustworthy tenant is something of a boon for property investors.
Immediate rental income… no upfront agents fees… confidence in the reliability of the occupant… it’s an investors dream!
If only it were that easy!
Currently-tenanted properties can work in your favour, but not always, so you need to know the ins and outs of purchasing with renters in place.
Here are some questions to ask before you make any offers:
1. What are the specifics of the tenant’s lease agreement?
Leases stay as agreed when a property changes ownership hands.
This means that just because the dwelling is now owned by someone new, the new landlord cannot void the current occupant’s lease (i.e. kick them out), and the occupant cannot break the lease without paying the agreed fees.
It’s not a get out of jail free card, which is why it’s so important to do your homework on the tenant and the lease before purchasing.
Having said that, always check the lease for any special clauses allowing the tenant to break the lease in the event of a sale.
It’s uncommon, but it does happen.
There is also the possibility of new owner and current tenant coming to a mutual break-lease agreement, but it must be agreed upon by both parties.
2. How long has the tenant lived in the property?
In most cases, the most favourable tenancy agreements for you will be long-term fixed lease tenants, who have lived in the dwelling for a decent enough amount of time to prove their level of reliability, but not that long that they’re paying an amount equal to far under market value.
This can be one of the traps that landlords fall into – failing to pass on regular rent increases to good quality tenants – and if this is the situation when you buy, you could be faced with the possibility of hiking the tenant’s rent by up to $100 a week, or even more.
They may move on if this is the case, so be sure to research comparable market rents and vacancy rates to ensure your investing with all options considered.
3. What is the current tenant paying in rent?
Remember that if there’s a tenant in the property paying below-market rent, you need to look at the length of their remaining lease to determine if it’s worth hanging in there at the current rate and then negotiating a higher rent when the lease is up for renewal.
At worst, you will lose your tenant and have to find a new one with a bumped-up rental price, but this is a financial calculation you may need to factor into your offer.
As a sneaky aside, don’t be put off too quickly by tenants paying below market rent.
It can cause other investors to reject the property and drive down the sale value, which is good news for you if you do your research and find that it’s got excellent potential!
Conversely, if the rental rate seems too high for the current market, you need to make sure the rate is sustainable if and when the tenant leaves.
If you have to drop the rent, that can impact on the serviceability of your investment loan.
A true red flag would be a short lease and high rent, which may have been intentionally set up to make the property seem more valuable.
4. What’s your intuition on the property manager?
Property managers do not come with the property.
You can absolutely choose your own property manager, or choose to do the job yourself.
However, as long as the property manager is dependable, they can be a wealth of information about the tenants, the history of the property and any repairs or renovations it has seen.
5. Are you being swayed by the current tenancy and is there a better option?
Don’t be fooled into thinking that a currently tenanted dwelling means that it’s a sound investment.
Thoroughly check the local market and other similar properties for sale and for rent.
Ask yourself: could you get a better price on another home without a tenant, even if it means having a vacant property for a period of time?
6. Are there any additional agreements that could land you in hot water?
Has the tenant been promised an interior re-paint or a new stove?
Has the landlord agreed to install ceiling fans or pay for monthly lawn maintenance or energy bills as part of the rent?
If any agreement has taken place between the landlord and the tenant, then you as the new landlord are also bound by it.
Go over the lease with a fine tooth comb to check for any unexpected inclusions or agreements, and always ask about any verbal guarantees or future alterations that have been agreed on.
The Bottom Line:
Having an occupied property is certainly appealing, but always remember that rental is secondary to owning the type of property that will increase in value in the long term because of its location, its style and its amenity.
Having a tenant in place upon purchase should always be secondary to securing a property with the basic fundamentals of a successful long-term investment.