Pros and Cons of Purchasing Rental Property Occupied by Existing Tenants

Buying a rental dwelling with existing tenants has risks and benefits. This article summarizes the pros and cons of purchasing a home with existing tenants and the potential challenges faced by landlords contemplating a purchase of tenant-occupied property. 

The Existing Lease Agreement Controls

When rental property is purchased by a new owner, he or she succeeds to the rights and obligations of the former owner under the lease agreement between the prior owner and the tenants.  The new owner must therefore abide by the terms of the existing lease agreement and will not be able to raise the rent, modify clauses, or terminate the lease while it is in effect.  Accordingly, prospective purchasers of the property should make sure to thoroughly read and understand the lease agreement to ensure they are willing to accept its terms and conditions. 

Benefits of Purchasing Property with Existing Tenants

These are the primary benefits of purchasing property with existing tenants:

• The buyer receives immediate cash flow from the property in the form of rental payments made by the tenant.
• The buyer will not have to incur expenses associated with renovating the home since the property is already furnished and rented out.
• The buyer avoids the expense of marketing the property to prospective tenants.
• The home should already be in good, habitable condition.

Drawbacks of Buying a House with Existing Tenants

These are the main downsides to purchasing tenant-occupied rental property:

• The right to personally screen the existing tenants does not exist.  Instead, the prospective purchaser is forced to rely on the previous owner’s tenant screening process. This creates the risk of having to deal with problematic tenants.
• The terms and conditions of the current lease agreement must be honored and rent may not be increased until the lease expires.
• There is a possibility that the property may not be in compliance with applicable laws, if the previous owner did not abide by his contractual and legal obligations owed to the tenant.  As the successor owner, the buyer would bear responsibility for remedying any defective or non-compliant conditions of the property.
• The prospective purchaser cannot move in immediately and use the house as his own if that was the plan.

Other Considerations

It’s a good idea to meet the existing tenants before buying a tenant-occupied property.  The seller can help you arrange such a meeting.  This allows you to personally observe the condition of the property.

You should also make sure the tenants have been regularly paying their rent on time and have been complying with their other obligations as tenants.  It’s also important to understand whether the previous owner met his obligations under the lease by maintaining a safe and healthy home for their tenants. 

There are benefits and drawbacks associated with buying a house with tenants. Having a turnkey operation in place will generate immediate financial rewards, but occupied properties can just as easily stick you with bad tenants. Prospective buyers need to carefully assess these implications before entering into the real estate transaction, and continue to monitor any developments affecting the landlord-tenant relationship after consummation of the agreement to purchase the rental property.    

Please contact Lynx Legal with any questions regarding the above, or to discuss any issues relating to a contemplated eviction of your tenant.  We can be reached at 925-663-8661 or info@lynxlegal.com.  You can also schedule a free telephone consultation with one of our representatives on our website.  Our experienced professionals are standing by to assist in any way we can.