Inheriting tenant problems when you buy an investment property

As a property investor should you buy a property with a tenant already in place?

On the surface, it seems to make a lot of sense for an investor to buy an already tenanted property. Think about it, there is no need to pay a letting fee or worry about the property sitting vacant, and you can start receiving rent from day one.

Just sign on the dotted line and you instantly have an investment property that is working for you.

Such is the apparent appeal of a tenanted property that some investors specifically seek them out.

But as professional buyer’s agents we are aware of a number of hidden dangers that investors need to watch out for when considering this type of property.

So what could go wrong when you buy a tenanted property?

The obvious risk is that you could inherit a less than desirable tenant that either won’t care for the property or pay rent on time.

Such a tenant could cost you considerable time and money and jeopardise the success of your investment. Imagine finding out that the tenant was in fact the reason the previous owner decided to sell.

It doesn’t stop there.

The lease documents can also contain hidden problems that you will inherit as the new owner.

In one of the worrying cases we’ve encountered, the previous owner had allowed the tenant to use the bond to cover the rent arrears, meaning there wouldn’t have been any bond monies to help insure the new owner against potential damage to the property.

Luckily for the new owner, our team discovered this problem and was able to withhold sufficient funds at settlement.

But a novice or unrepresented investor could have easily been stung in this scenario.

We’ve also seen leases that are simply inadequate in one area or another, such as not allowing for regular inspections.

Worse still, we’ve encountered tenanted properties with no paperwork at all, which can cause all sorts of problems if you want to end the tenancy.[sam id=37 codes=’true’]

Another potential area of concern involves the Property Condition Report (PCR), which is supposed to accurately document the condition of the property at the commencement of the lease.

If the PCR lacks relevant detail, it can cause problems when you are trying to prove that the tenant has damaged the property because there is no baseline for comparison.

In one recent case, the previous owner didn’t believe a PCR was needed because the property was so well presented. But without a PCR, it’s impossible to prove this was in fact the case.

With all the problems a new owner could potentially inherit when buying a tenanted property, we always make sure that all necessary documentation is reviewed prior to unconditionally purchasing a property on behalf of our clients.

And we’re lucky to have the expertise of of proficient property managers to assist us in this area.

In situations where there is a periodic lease in place and the tenant and paperwork are not up to our standards we would typically stipulate in the offer that the property must be provided with vacant possession to avoid any issues altogether.

However, where there is a fixed term lease, the best thing we can do is investigate the situation and develop a plan to manage any issues when the lease expires.



Want more of this type of information?


Damian Collins

About

Damian is managing director of Momentum Wealth, a Perth based property investment consultancy firm. A successful property investor in his own right, Damian formed Momentum Wealth to assist time poor investors in building their portfolios and applies his many years of experience to help clients accelerate their wealth creation. Visit www.momentumwealth.com.au


'Inheriting tenant problems when you buy an investment property' have 2 comments

  1. July 6, 2014 @ 12:40 pm Melodie

    Thanks for this Damian. A few queries though…
    – What can a potential new owner do to ensure the paperwork etc for a sitting tenant is in order?
    – If a condition was put in the Offer to Purchase, what sort of time frame would be reasonable for property enquiries to be made to ensure paperwork etc is in order?
    – It is an offence for tenants to stop paying rent with the intention the amount owing will be taken out of the bond. Does the approval of the previous owner over-ride this?
    Cheers

    Reply

    • Damian Collins

      July 6, 2014 @ 8:34 pm Damian Collins

      Hi Melodie. Thanks for the questions and see my responses below:

      – What can a potential new owner do to ensure the paperwork etc for a sitting tenant is in order?you should ask for this before placing the offer. There should be no reason why a seller would not provide this information.
      As part of our due diligence on a property we make it condition of the offer that the lease, tenant ledgers, most recent inspection reports and other relevant information is provided within 5 days of the offer being accepted. If you are not buying subject to due diligence then you should ask for this information before the offer / auction.
      – If a condition was put in the Offer to Purchase, what sort of time frame would be reasonable for property enquiries to be made to ensure paperwork etc is in order?
      Information to be provided within 5 days and 5 days from then to be satisfied.
      – It is an offence for tenants to stop paying rent with the intention the amount owing will be taken out of the bond. Does the approval of the previous owner over-ride this?
      It is an offence for the tenant to do it but if the owner agrees then it is mutually agreed and no offence has occurred. Hence you need to check the bond is still in place and if you have purchased a property with a lease in place disclosing a bond then the owner is responsible for ensuring that is in place at settlement.

      I hope that helps. Remember these are important items to check but it probably wouldn’t prevent you from buying in most cases – it may just affect the price you would pay marginally.

      Reply


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