Thinking of buying a turnkey property? One that’s ready to go, complete with existing tenants who are paying rent?
For most landlords, this can be an excellent chance to jumpstart your profitability and start generating cash flow right away. There’s no downtime while you wait for applications to start rolling in, and you won’t have to spend time fielding inquiries on the property, or screening tenants. This situation might seem ideal, and in many cases it can be, but it’s not always smooth sailing. Before you dive in, it’s important to ensure that you’ve done your research and that you understand some of the potential risks that are involved with this type of setup as well.
In this article, we’ll go through some of the benefits of purchasing a property that’s ready to go, and highlight some potential risks as well.
Benefits of Buying an Occupied Rental
- Immediate Cash Flow
First up, with an occupied property, you’ll be able to start generating cash flow right from the start. You won’t need to waste any time advertising and screening tenants. You can hit the ground running and won’t have to wait a few months to start making that mortgage payment. That’s immediate passive income from your property.
- The Property Is Ready to Go
Another great thing about purchasing an occupied property is that you can know for certain that the property is tenant-ready. You won’t have to wonder if there are requirements that will need to be met first before you can start renting. It’s ready to go!
- Insight Into the Property’s Performance as a Rental
Finally, when you buy an occupied property, there’s less guesswork. Instead, you’ll have the advantage of seeing whether or not you’re buying a fully functioning cash flow machine that has a proven track record of success. You can find out whether the tenants have been paying the rent on time, and will be able to tell by the condition of the property how they’ve been treating it. You’ll also be able to know how much the property can rent for each month, no need to research other, similar properties to make an educated guess.
Potential Risks of an Occupied Property
- Risk: Removing Tenants Can Be Complicated
When you buy an occupied property, the existing lease that’s in place will still need to be upheld. This means that as long as the tenants are abiding by the terms of the lease, then you’ll need to abide by the lease as well. If you would like to make changes to the lease, raise the rent, or remove the tenant from the property, you may need to wait until their tenancy runs out first. Before you buy, make sure you find out what type of lease the tenants are under first. In most cases, a month-to-month contract will give you the most flexibility.
- Risk: Uncooperative Tenants
In some rare cases, tenants may try to test their boundaries with new landlords. They may also balk at the idea of any changes, like rent increases being brought in soon after the property changes ownership. This is because they will have become accustomed to things being a certain way with the previous landlord, and will expect things to carry on exactly the same with the new one. For this reason, you’ll want to ensure that you make a fresh start with the tenants. Keep them in the loop with what’s happening, respect their rights, and try to be understanding of the fact that there will be an adjustment period as you both get used to the new arrangement. To keep everyone happy, it’s always a good idea to save any major changes for a few months down the road.
- Risk: Tenants May Not Have Been Screened Properly
Finally, there’s always a risk that the existing occupants may not have been screened properly, or that something may have fallen through the cracks. Before you invest in a property, especially one that has a longer lease, you may want to check with the landlord or with the property management company in question to see about their tenant screening policy. You may also want to request copies of their rental application.
Now that we have the pros and cons out of the way, it’s important to take a look at some of the other things you should know before buying.
Research Is Still Important
As with any purchase of a property, it is important that you do your research before buying. The same amount of research should be given to a home that already has tenants, as a home that doesn’t have any. Just because the property is already rented doesn’t guarantee it will always be that way. Be sure to research the local housing market to ensure the returns are in line with your goals, and that you will be able to find new tenants should the current ones leave.
Learn more about the questions you should ask before investing: Questions You Should Ask Before Investing in a Rental Property
Read the Lease
Remember, when you purchase a property with tenants living in there, you are also purchasing the lease and assuming any and all responsibilities and claims made. You can’t rewrite the lease on a whim, so be sure to read all the fine print to ensure you know exactly what you are taking on.
If the current tenants only have a month-to-month agreement you have a few more options available to you. In fact, with adequate notice, you can draw up a new lease agreement that reflects your new policies and rent changes if needed. It is important, however, that you keep in mind the state and local laws when it comes to adjusting the rents. Drawing up a new lease can be beneficial to both you and the new tenants, helping to protect both your investment as well as ensuring you are both on the same page as far as obligations and requirements go.
The Tenants Have Rights
Remember: your tenants have rights. When you buy an occupied property, you’re purchasing not only the property but also the lease that goes with it. Just because you are the new owner does not mean you have the right to change everything. There may be clauses in the lease that you will need to consult first. Be sure to read the lease completely and understand what you are agreeing to before you sign.
Be Aware of Your Responsibilities
Whether the property is occupied or vacant at the time of purchase, as a landlord you have certain responsibilities and obligations to meet. Landlords in most states are required to maintain a safe and habitable property. Among other things, this list generally includes:
- Keeping common areas safe and clean (For multi-family units)
- Maintaining and ensuring that structural elements such as the room, floors, and walls are safe
- Providing access to running water, hot water, and heat
- Maintaining electrical, plumbing, heating, and ventilation systems
It is important to note that each state has its own variation of these duties. Check out this website for landlord laws by state.
Aside from following the legal requirements of being a landlord, there is a lot you can do to help the relationship with your future tenants as well. One of the best things you can do is open the lines of communication from the start. If you are going to be managing the property yourself, make sure you introduce yourself to the tenants and give them your contact information so they can get ahold of you if an issue arises. Always give the required notice before turning up at the property, and make sure you approach any new changes, like rent increases, diplomatically. Remember, treating your tenants with respect doesn’t cost anything, but it often goes a long way.
Looking for more tips on being a good landlord? Read: How to Be an Excellent Landlord
While buying a tenant-occupied property isn’t for everyone, it certainly has its benefits. Just make sure you understand the details of the lease, and ensure that you are comfortable agreeing to the terms. You’ll also want to be clear on your responsibilities as a landlord, and research the property and the housing market in question. With this approach, you’ll be able to determine whether a potential investment is right for you, before you take the leap.
Looking to get started with income property? At Renters Warehouse, we can help. Find an investment property that meets your criteria today!
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