Posted by By Paul Branton, Director of Investor Services for Home Rental Services
Investing in rental property is a great way to build long-term wealth, and one option investors encounter is purchasing a property that already has tenants in place. While this may seem like a shortcut to instant cash flow, it also comes with unique considerations and quite a few potential pitfalls.
With that said, here are some of the Pros/Cons of buying a tenant-occupied rental property:
Pros of Buying a Tenant-Occupied Property:
Immediate Cash Flow
One of the biggest advantages is the ability to start generating rental income from day one. With tenants already in place, you don’t have to worry about marketing the property, screening tenants, or dealing with a vacancy right after purchase.
Proof of Rental Demand
An existing lease is proof that the property is rentable and attractive to tenants. It can also indicate that the area has a healthy rental market, which reduces the risk of extended vacancies.
Simplified Financing and Cash Flow Projections
Lenders often favor properties that are generating income. If the tenants are paying market-rate rent and have a history of on-time payments, this can help strengthen your loan application and make cash flow projections more reliable.
Time Savings
You skip the initial legwork involved in advertising the property, showing it, and screening tenants.
Cons of Buying a Tenant-Occupied Property:
Inherited Lease Terms
You’re stuck with the terms of any existing lease until it expires. This means you can’t raise rent, change policies, or ask the tenant to leave until the lease ends—unless of course, the tenant violates the lease.
Unknown Tenant Behavior
Even if the seller provides payment records, you will not truly know the quality of the tenant until dealing with them directly. A quiet tenant might seem like a dream but could still be neglecting the property or violating lease terms in subtle ways you won’t notice until you own/manage the property.
Maintenance and Property Condition
With tenants in place, you might not have the opportunity for a more thorough inspection of every room. If deferred maintenance exists (and it almost always does), you may not discover it until after closing. You also inherit any tenant-related wear and tear, which likely increases repair costs down the line. (And the condition at tenant “move-in” may not have been properly documented.)
Tenant Relationship Challenges
You’re stepping into a landlord-tenant relationship midstream, which can be tricky. Tenants may be wary of a new owner and resistant to changes in communication, expectations, or procedures. i.e. “Walter always let me pay a few days late and it wasn’t a big deal.”
Legal and Regulatory Complexity
In tenant-friendly jurisdictions, evicting a problem tenant or raising the rent to market rate may be time-consuming and heavily regulated. Be sure to understand local laws before you commit to the purchase of a particular property, tenant occupied or not.
Final Thoughts: Is It Worth It?
Buying a rental property with existing tenants might sound like a great move especially if the numbers appear to work and the tenants seem reliable. Unfortunately, even with all the proper due diligence, and even if the “numbers work”, our experience with this type of acquisition would say the potential reward is not worth the risk.
Have you ever bought a property with tenants already in place? Share your experience in the comments! And if you need help finding an investment property, give us a call. It is one of the things we do for our clients!
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