Buying Rental Property with Tenants in Place: Risk vs. Reward

Most investors sell their rental properties while they’re empty. It’s easier to schedule and conduct showings for buyers, plus it gives the owner time and space to make repairs or upgrades for a more profitable sale. However, in today’s market, more and more investment properties are offered with tenants already in place. This may sound great to first time investors, but experienced landlords will be cautious. There are benefits, like the potential to be cash flow positive right away, but there are also associated risks. The tenants, their lease, and the property’s condition all need to be analyzed first! Before you close on a purchase, let’s be sure you know what those all are. 

The Possible Rewards: 

Before we analyze the risks, here’s the nice side of things. Buying a property with tenants in place, in theory, has its perks:

1. The home likely meets local rules/regulations if tenants are active.
2. Some amount of rental income is immediately guaranteed, based on the original leases signed between tenant and seller.
3. No immediate upgrades or repairs should be required.
4. There is no need to market vacancies after purchasing the investment property.

The Potential Risks:

It’s not all roses though. Landlord’s don’t always have good tenants or know the best practice for writing lease agreements or conducting maintenance. If you purchase a rental property from someone who didn’t know what they were doing, you could be walking into the same trap yourself!

Look at the Lease:

One thing you won’t be able to scrap are the lease agreements that are already in place with tenants. You’ll need to review these leases thoroughly before you make any decision to purchase the property. Make sure that the agreements are in compliance with local and federal laws, maybe even by having an attorney review them with you. Are the terms also fair to the landlord (soon to be you) and the tenants? Save yourself a legal battle in the future by reviewing the leases in advance. 

You won’t be able to adjust pricing or terms until the time lapses either. Are you comfortable with the rates that the current owner is getting, and will they allow you to be cash-flow positive after you purchase the property and start incurring expenses? 

Screen the Current Tenants, AGAIN:

Do your due diligence when it comes to screening the tenants too. For some landlords, the best way to alleviate their headaches from bad tenants is by offloading the property through a sale. That’s why you need to do your homework here, so you’re not stuck with the same issues! It’s perfectly reasonable, smart even, to request all the tenant screening documents (income/credit/backgrounds reports) collected by the current owner before they signed the leases and make sure this is something you’re ready to take on. 

If tenants aren’t paying the rent on time or aren’t abiding by the terms set out in their lease, the potential to profit may not be worth the headache. Don’t just take the seller’s word on things either. Require documents that show a history of rent payments and be sure the security deposit is sufficient if you think there may be damages assessed when the lease term ends. Pets can be a landlord's nightmare too, so ensure the correct pets and policies are in place to protect yourself there. 

Are Your Tenants Treating the Property Well?

Maybe the tenants meet all the income and background criteria you’d normally look for, that’s a great place to start! What you also need to figure out is how well they are caring for the property while living there. Conduct a detailed walk through on each unit and note how tenants have kept things. Generally, repairs fall on the property owner, and you’re about to assume that role! Be sure you understand the relationship you’re walking into. 

As the new landlord, you’ll have a responsibility to provide a safe and livable environment as soon as you close on the property. If it looks like that isn’t going to be possible because of the current condition of the units, you’ll have to weigh your options carefully. You don’t want to discover major mechanical, structural, or utility problems only after you’ve finalized the purchase. 

Wrapping Up:

There are definitely rewards for picking a rental property with solid tenants in place, but there are risks to consider as well. Don’t make a final decision to buy until you’ve reviewed the existing leases, screened the current tenants, and thoroughly assessed damages and repairs needed. Good luck investors! 

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