Purchasing a rental home with current tenants is more than just convenient; it’s a great investment opportunity. Being able to avoid renovations, advertising, and tenant screening is just the first benefit. But it’s crucial to recognize that acquiring a rental property with existing tenants can also come with certain challenges. To take full advantage of this opportunity, it’s important to educate yourself about the process and potential pitfalls.
Conducting Due Diligence
The quick cash flow and turnkey setup of buying a leased property may appear to be an attractive choice for your next investment. However, don’t assume that a leased property is in good condition or that the tenants are reliable and pay rent on time. Instead, make sure to do your due diligence to verify that the leased property is a sound investment.
The first thing to examine when considering a leased property is the current lease agreement. If you buy a property that has tenants, you automatically assume the lease agreement they signed with the prior landlord.
Since the lease is a binding contract, you must be prepared to follow its terms until it expires or is up for renewal. In some cases, the tenant agrees to end the lease upon the sale of the property, but this is rare. Typically, you’ll need to be aware of any prior agreements that govern your new investment.
Assess tenant payment history and lease terms
Aside from going over the existing lease documents, you should thoroughly screen the current tenants before purchasing the property. Treat this screening as if the tenants were first-time applicants, performing background checks, credit checks, and confirming their payment history and references.
Additionally, confirm with the current owner or landlord that the tenant’s security deposit has been paid and is kept in a separate bank account.
Inspecting the property with tenants in place
Along with screening tenants, it’s necessary to carry out a full inspection of the property. To fully understand the property’s condition, it’s important to inspect both the house and the yard in person.
With tenants already occupying the property, it’s essential to be careful and evaluate how well they maintain the home and yard. Don’t forget to ask the current owner about any past or present insurance claims, particularly if they were caused by the tenants. A high number of insurance claims could make it difficult to insure the property after the sale.
If everything turns out fine, you might have secured an excellent rental property with existing tenants. Regardless of whether your new property has tenants, you’ll need to maintain it in livable condition, make sure the electrical and plumbing systems are in working order, and confirm the structural integrity of the building. Though your new rental property may come with tenants, once the sale is finalized, you take full responsibility for managing and maintaining it.
Managing a property can be quite demanding, particularly if you handle everything yourself. Consider outsourcing the daily management tasks to the professionals at Real Property Management First Coast. For more information about our property management services in Green Cove Springs and nearby, contact us today or at 904-425-8388.
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