Buying a House with Tenants – What You Need to Know
Buying a house with existing tenants comes with both risks and rewards. If you’re an investor who wants to become a landlord, buying a tenant-occupied investment property can be appealing in a way that you will start earning rent income as soon as you buy the property. However, the process becomes complicated if you want to buy the house as your primary residence and not as an investment property.
It is essential to know what to expect when buying a house with tenants and be aware of the potential challenges you might encounter. There are certain guidelines and obligations that you need to know before deciding to buy a tenant-occupied property.
Buying The House as Investment Property
Most investors would prefer to screen the tenants and set their own terms and conditions in the lease agreement. However, if you buy an investment property with existing tenants, you will have to commit to the current lease agreement until the term of the lease ends. Therefore, you need to completely understand how you can manage existing and future tenants legally from raising rents to evictions.
Here are a few important things that you need to know when buying a tenant-occupied investment property:
1 The Existing Lease Remains Legal
The sale of a rental property to a new owner does not make the existing lease agreement null and void. Since leases are tied to the property itself and not to the owner, you will be legally bound to the existing agreement until the end of the term if you choose to buy the property. This means you will not be able to raise the rent, modify clauses, or terminate the lease just because you are the new owner. Hence, it’s important to read and understand the lease agreement thoroughly and ensure you are willing to abide by its terms before deciding to buy the property.
2. Understand The Rights of The Tenants
Understanding the rights of the tenants is crucial in buying a tenant-occupied property. There are certain guidelines that need to be followed especially when it comes to visiting and viewing the property. For expiring leases, it’s essential to give ample notice to tenants if you are not planning to renew their lease. Ideally, tenants should be given 60 to 120 days’ written notice that the lease is being terminated. You should also give prior notice to tenants if you are planning to change the terms of the agreement.
3. Know Your Obligations As Landlord
Buying the house as an investment property means you are willing to take the role of a landlord, so you should be aware of the obligations that come with it. Your obligations as a landlord may vary depending on what was stated in the lease agreement.
In general, you should be responsible for providing a safe and habitable environment for the tenants. This means you should ensure that the common areas are clean and in good condition and that the physical aspect of the property is well-maintained. Other possible landlord obligations include the need to provide the tenants with access to running water and heat, arrange for trash removal, perform regular maintenance of HVAC systems, and ensure that necessary repairs for the property are done.
Buying The House as Primary Residence
One big challenge that you need to face when you are buying a tenant-occupied house as a primary residence is the process of evicting the tenants. Because the lease agreement remains legal even with the change of ownership, you will need to wait until the lease term ends before you can evict the tenants and move in.
Fortunately, there are exemptions to this rule:
- When the existing lease agreement specifies that the owner (in this case the property’s seller) has the right to terminate to the lease upon selling the property.
- If the property that you are buying is a foreclosure, you can refer to your state’s law and regulations regarding notice to vacate.
- You can specify in your offer that you want to buy the property provided that it should be vacant upon closing. With this, the burden is placed upon the seller to negotiate with the existing tenants or to find a way to legally break the lease.
If your situation falls in any of the above, you may be able to have the property vacated upon closing. However, whatever you and the seller agree upon, it’s necessary to carefully abide by your state’s landlord and tenant law to avoid potential legal issues later on.
Pros and Cons of Buying a House With Tenants
There are benefits and drawbacks associated with buying a house with tenants. You need to carefully assess the implications of these pros and cons to ensure that you make the right decision based on your personal plans and priorities.
Pros of Buying a House With Tenants:
- You will have an immediate cash flow and generate rent income upon closing.
- You won’t have to make extra investments to refurbish the house as the property is already furnished and rented out.
- You won’t have to spend money to market the property.
- You won’t have to wait for months to find renters.
- You will have a limited risk of the property being idle and vacant, especially if the existing lease if for the long-term.
- A tenant-occupied property means it meets all the legal requirements to be rented out, including several health and safety requirements.
Cons of Buying a House With Tenants:
- You will not be able to screen your tenants yourself as you are forced to rely on the previous owner’s tenant screening process. This gives you the risk of having to deal with problematic tenants.
- Evicting problematic tenants can be a complicated process as it typically involves long notice periods and filing of complex paperwork.
- You cannot change the terms and conditions of the current lease agreement and may not raise the rent until the lease expires.
- If you are not careful, you may encounter some legal risk because there is a possibility that the property may not be in compliance with certain laws. If the previous owner did not abide by the legal requisites and illegally rent out the property, the liability may fall on the current property owner. When this happens, you may be faced with a long legal process and heavy fines.
- You cannot move in immediately and use the house as your own if you are not planning to rent out the property.
Important Things to Do Before Buying a House With Tenants
The process of buying a property with tenants may not be the same as with buying vacant property. Whether you are planning to use the house as your own residence or buy it as an investment property, there are important things that you should do to ensure that you are making a well-informed investment decision.
Know The Existing Landlord-and-Tenant Law
The landlord-and-tenant law governs the rental of commercial and residential property and includes the rights and obligations of both the landlord and tenant. This is especially important if you plan to have the property vacated upon closing. It’s essential to ensure that the process is done legally and avoid potential legal issues in the future.
Ensure That the Property Meets the Legal Requisites
Before buying the property, you should ensure that it meets all legal requirements and that it is in compliance with the law. This will save you from possible legal problems later on in case the previous owner has been renting out the property illegally.
Read and Understand the Lease Agreement
As the new owner of the property, you will have to adhere to the pre-existing lease agreement between the previous owner and the tenants. This is why it’s important to read the agreement thoroughly and understand how it affects you as the new landlord and owner of the property.
The agreement should include the amount of rent, how often you can increase the rent, the obligations of the landlord and the tenant, when the term ends, and other provisions you may find useful later on.
Get to Know the Tenants
With the help of the seller, consider introducing yourself to existing tenants as a potential new owner of the property. When you buy the property, you will also inherit them as your tenants, so it’s necessary to get to know them beforehand. This will make you and the tenants feel more comfortable during the transition period.
You should also make sure the tenants are paying the rent right now. The last thing you need is to purchase a rental property that has tenants who are already behind in the mortgage. Ask the seller for documentation of the rent payment history for each of the current tenants.
Request for Proper Turnover of Necessary Documentation
Ask the seller to provide you with documentation that reflects the state of the rental property before the tenant moved in. This will help you identify which repairs you should cover and which ones should be shouldered by the tenants. Also, when making an offer, you should specify that the seller should transfer the security deposit and any prepaid rent to your account.
Work With a Professional
Buying a house with tenants can be a good deal as long as proper due diligence is done and the process is legal. It’s best to work with a professional to check for any irregularities that an inexperienced buyer might miss. You also have the option to hire an experienced real estate lawyer to make sure all the details are stipulated in the purchase agreement, especially if you want to have vacant possession.
For many people, being a landlord is not something they are interested in because of the fear of dealing with tenants, repairs, and everything else that may go with the territory. However, owning rental properties is how you traditionally build wealth in real estate. This is an excellent time for you to start the process and start your journey towards financial freedom.
If you would like to speak with a professional about your financing options for a rental property, click here to complete the short loan scenario form.
Should I purchase a rental property under an LLC?
You can purchase the property under an LLC and it may provide you with some personal protections. We suggest consulting with both an attorney and an accountant to see how it would impact you. Start by reading our article on purchasing a home under an LLC.
Do you have to honor a lease when you buy a house?
When you purchase a home that is occupied by a tenant who also has a lease to rent that property then you likely must honor that lease until it expires. Suggest reading all lease agreements prior to purchasing a rental property and visiting with the local laws about your ability to end the lease earlier if needed.
How do you evict a tenant after buying a house?
You will need to follow the local eviction laws after purchasing a home with tenants. New ownership does not waive the tenant’s rights or their lease agreement unless that lease agreement has a clause that would end the lease in the event of a sale.
First Time Landlords – This article will walk you though much of what you need to know about becoming a landlord for the first time.
Rental Property Depreciation Rules for Investors – If you plan on purchasing a rental property, you should learn how to depreciate that property over time.
Selling a Property with Tenants – If you are selling and not buying, you should understand how this will impact you as well.
Things to Do Before Buying Your First Rental Property – Follow these four tips before buying a house with tenants.