How To Handle Acquiring Properties With Tenants

What’s the best way to handle property acquisitions where you may be inheriting tenants?

Is buying properties with existing tenants smart? If so, how can real estate investors navigate this minefield? What due diligence and evaluation should investors do before they close the deal?

The Issues & Advantages of Buying Properties with Tenants

Some investors focus on searching for properties with existing tenants. It can give them confidence that the property is desirable to renters, and may already be producing positive cash flow from day one. This can eliminate a lot of risk and guesswork.

Of course, you also want to know why a property which is already rented is being sold. If it is that profitable of a deal, why would a landlord sell it? It happens. It could be an REO, or a take back by a note investor. It could be an inherited property. Or there could be deferred maintenance an investor can’t afford. Or the tenant may not be performing. These deals can be highly profitable if negotiated at the right price. They can also require extra work if there is a difficult and malicious occupant in the property. Or it may just require extra work to move them on so that the property can be renovated and resold or re-rented at current market rates.

Smart Handling of Occupied Properties

The first step is to know your local landlord-tenant laws very well. Or at least have very good property management ready to step on the job from day one. You need to know what your rights are, and what the occupant’s rights are. Know how much notice you need to give them to vacate, and how long and expensive an eviction can be.

Before the deal is closed it is wise to get ahold of any lease agreements and rent rolls available. Make sure these are verified with tenants, as well as their current status. Your title company or attorney can do this via an estoppel letter. Where possible it is also wise to make contact and begin building a relationship with the renter. If they are behind, this new relationship may be just what is needed to get them back on track. If they are a good tenant, you will want to make sure they know they can stay and that you’ll work out a fair deal with them. Otherwise great tenants can take off, mistakenly believing that you plan to kick them out or jack the rent way up. Don’t lose them, and precious cash flow due to wrong assumptions.

Summary

Acquiring properties with existing tenants can be highly profitable. There are perks to it. If you don’t know what you are walking into, or there is a lack of clarity and communication, it can all get ugly fast. Take smart due diligence steps, verify all you can, and be sure that all efforts are made to conduct a smooth transition.

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Image by Gerd Altmann from Pixabay