Buying a property that already has tenants in place can be a bonus but you will need a methodical and thorough investigation into the status quo before you make any decision. The bottom line is that your buying decision should be based primarily on the fundamentals of the property itself as a good, long-term investment and should not be influenced by the fact it is currently tenanted.
It’s also important to know that as the new owner/landlord, you are bound by any existing agreement between the tenant and the previous landlord. In other words, the lease stays as it is unless both parties agree to change the conditions or break the lease
These are some of the pros and cons of buying a property with existing tenants.
On the upside, you will:
- Have immediate rental income
- Save initial costs such as advertising the property and pre-lease cleaning
- Save time finding suitable tenants
The downsides include:
- Unsuitable, difficult or demanding tenants
- Long-term tenants who are paying below market rates
- Unfavourable lease agreements
Buying a tenanted property is appealing and it can translate into real benefits but there are pitfalls for the unwary. Reviewing all the documentation thoroughly, doing your homework on the tenant, asking questions of the property manager and comparing the property and its rental yield to the rest of the market will help you mitigate the risks and identify the upsides.
Here are some questions you should answer before signing any contract to buy a tenanted property:
- How long has the tenant been living in the property and what is their payment record?
- What are the terms of the tenant’s lease? (Length of lease, renewal options, frequency and value of rental increases etc)
- Are there any additional agreements or concessions, including verbal ones? (For example, has the current owner agreed to paint the house or upgrade the air conditioning? Does the rent include any utilities or services, such as lawn mowing or energy bills?)
- Has the bond been lodged properly?
- Are you happy with the frequency of inspections?
- Is the property condition report accurate?
If the property is being managed by an agent, they can also be a source of valuable information about a range of issues including the tenant history, the history of the property itself and any upgrades or renovations that have been done.