More often than not, people who are serious about buying a tenant-occupied home are looking at the property for an investment purpose. It makes a lot of sense financially, but it is paramount to be smart about the decision and thoroughly understand both the benefits and drawbacks of the arrangement and purchase.
Similarly, if you’re buying a home with tenants that you wish to move into you’re probably wondering if you can kick them out of the house.
The first step is making sure you’re familiar with tenant’s rights in the city and state that you’re buying in, as the laws vary by location. You’ll also want to take an in-depth look at any existing lease agreements.
Let’s take a look at some precautions you can take before purchasing a home to avoid a mistake.
Pros and Cons of Buying a Tenant Occupied Home
The largest benefit of buying a home that already has a tenant or tenants is instant gratification. As soon as you assume ownership, you begin receiving payments creating rental income without having to lift a finger. This eliminates the need for any advertising, processing applications, and running background checks on many different applicants. This saves you time and cash. The tenants have been in the home for some time, so you are sure not to have to deal with a new move-in. They should be familiar with the property, and hopefully, if you purchase a property that is in good standing, you will not have any initial issues.
The most significant drawback of having existing tenants in your brand new property is that there is sometimes a risk of them not being very reliable or responsible. Maybe they do not take care of the property and are not very clean. Because you did not have the opportunity to vet the tenant, you may be inheriting a problematic mess. You may also find it challenging to evict or remove them and replace them with new tenants.
Can You Kick the Current Tenants Out When You Buy the House?
If you want to move into the house yourself or simply want to kick out the tenants and find new ones, you’ll need to refer to the terms of their existing lease. It should detail if and how they can be evicted if the home sells. Most of the time, it’s possible to terminate their lease early.
In some cases, the tenants will have a right to a lease termination payout, meaning the owner will offer the current tenant a payout on the lease in the event that the owner wants or needs that tenant out before the lease end date.
New Owner Obligations When Buying an Occupied Home
When you become the new owner of a tenant-occupied property, you take on many obligations and responsibilities. Arguably the most crucial part of being a landlord is providing a safe, clean, and healthy living property for the tenant. This means that you must ensure that all the home’s structural components are safe and up to code, including the walls, roofs, stairs, and walls. All electrical, heating, cooling, plumbing, hot water, and appliances must be up to code and in working order. Trash containers for easy disposal are also paramount, along with pest control, as cleanliness is a major stipulation.
Should You Keep the Current Tenants?
When the property transfers from one owner to another, so does the lease. This is similar to the interworking of covenant and easement transfers. Simply put, you cannot alter or modify the contract, bump up rents, or remove the current tenant. As previously stated, the rights of tenants vary from state to state in the US. Some common rights that tenants share nationwide are to follow.
Tenants are entitled to a 24-48 hour notice before a property owner, manager, property manager, or vendor enters the property. An exception exists if there is an emergency. If an owner is not going to renew the current lease, notice must be provided to the tenant 30-60 in advance of the lease expiring. This is also true if the lease is a month-to-month lease. Security deposits are typically returned upon tenants moving out, and a tenant can file a suit in small claims court if this does not happen as it should. It should be noted that in some states, the owner must give the tenant the first right of refusal to purchase the property if it is being sold.
Before you make the purchase, you should gather as many details as you can to do some investigating. You can request records regarding the current tenants’ rent payments and even a copy of their credit report. This will give you some insight into their dependability when it comes to paying rent. You will be able to force any potential issues that you may have down the road. Make sure you do a walkthrough of the property and inspect it for any damages. Take a look at the cleanliness of the home and check out appliances and fixtures. If they are older, you can expect to need to be doing some replacing in the near future. Doing this will help you to decide if the property is worth consideration.
Can You Meet the Tenants Before Buying?
There’s no law that prevents you from meeting the existing tenants before buying a house, and it’s definitely recommended to arrange an introduction, but it may not always be possible. If you’re unable to meet with the tenants before buying the home, it’s best to send them a landlord introduction letter prior to closing so that you can begin to establish a good relationship with them.
Where to Find Homes With Existing Tenants
There are many sources you can sift through to locate a house that is already occupied with renters. On the MLS, Multiple Listing Service, finding a home with tenants can prove to be complicated. All types of residential and commercial property are populated on MLS, and pinpointing ones that already have current tenants can prove to be slightly tricky. Usually, property located on the MLS is from real estate agents targeting owners, not investors.
Your real estate agent, however, should be able to locate off-market homes and wholesale property. While they are pointing you in the right direction, you can check Zillow, the real estate website, because they offer many different options in your search, including tenant-occupied properties for sale. You can do this by searching “tenant occupied” in the keyword search area. While there may not be an astonishing amount of results, you are sure to find a handful.
Local property management companies may also have an idea of which properties for sale already have current tenants. You may even be able to get your hands on a property that is not even on the market yet if the property manager knows an investor who is considering selling but hasn’t listed the property yet. Property managers are typically licensed real estate agents so they can even handle the transaction.
Buying Tenant-Occupied Property: Bottom Line
Buying tenant-occupied property can make a lot of sense for real estate investors that don't want to deal with the hassle of finding new tenants to rent out the home, but it's not for everyone. For example, if you buy a house with tenants and want to kick them out so you can move in, you might not be able to, depending on the lease. So before you buy a tenant-occupied home, make sure you consider exactly what your goals are to ensure you can achieve them.