So, as a buy-and-hold landlord, you’ve found a property to purchase that already has a tenant in place. Is this a good thing? It can be.
Ideally, the value of buying a property with a tenant in place is that the property is already cash flowing and you have income from the day you close on the property. However, you don’t want to take that for granted. So how do you know for sure?
- Ask the seller for all rental contracts. In this type of purchase, the tenants and contracts pass to any new buyer and the new buyer must abide by the terms of the contracts already in place. Often, seller rental contracts are very bad or even non-existant. You want to know the details and you want to see them before closing on the purchase. The seller should be giving you tenant information, but be sure to see what they have agreed to in writing – what they have signed, if anything – because you are legally bound by their existing contracts.
- Ask for documentation of tenant payment history. Do they pay on time? Do they pay at all? Part of the value of purchasing a property with tenants is income stream. Does it actually exist? Taking on existing tenants can be a real benefit, but it can also be an eviction nightmare. Does the seller have any kind of documentation to prove what the tenant performance has been?
- Be sure the tenant’s security deposit transfers to you at the time of closing. The tenant’s security deposit belongs to the tenant, not to the landlord. That’s why any time a property is sold with the tenant living in it, all contracts the tenant signed are still enforceable and any monies they put down to live in the property must transfer to stay with the tenant. Money to cover certain property damages can be withheld from the security deposit when the tenant moves out, but any security deposit money taken before that time or used for other purposes by the landlord is stealing. Be sure the deposit transfers at closing so you have money to cover tenant damages and/or to return to them when they move out. You, as the landlord are legally bound by the terms of the rental contract they signed, by the way, so you will be responsible to refund their security deposit and/or pay damages when they move whether or not you received it from the seller at purchase.
- Be sure the tenant is informed of the sale and where they should begin sending their payments after you’ve closed. Too many times the tenant continues to pay the old landlord (because they aren’t informed they have a new landlord) and you can be left with no payment and/or trying to get what’s rightfully yours back from the seller. Not a great start with your new tenant.
Don’t be disappointed if negotiations take extra time on a purchase with a tenant because of the need to provide these additional documents. The most important thing is to be thorough. If there are holes in the deal, you want to close them before the purchase, not be taken down by them afterwards.
What’s been your experience purchasing a property with an existing tenant? And be sure to check out my book, The Essential Handbook for Landlords.