Blog Common questions asked when buying a property with tenants

Common questions asked when buying a property with tenants

29 April 2020
Common questions asked when buying a property with tenants

When buying an investment property, it can either be an empty property or have tenants living in it. If it’s the latter, then those tenants will in most cases become your tenants if you choose to go ahead with the purchase.

This can make things easier in a lot of cases, but can also bring complications, so it’s important to know what your rights and responsibilities are as a landlord when buying a tenanted property.

Generally, you should look into the following things:

  • Who are the tenants?

  • What kind of lease agreement is in place?

  • How will you manage the property?

  • Is buying a tenanted property cheaper?

Who are the tenants?

One of the most important things you can do as a new landlord is to find out as much as you can about your new tenants, as they’ll be the ones paying rent and keeping the property in an acceptable condition.

Before buying, ask your seller all about the tenant(s) backgrounds, including:

  • What they do for a living

  • What their reported income is

  • How long they’ve lived there

  • How often they pay rent on time

  • How many problems they’ve caused if any

  • And how reasonable they are with regards to making requests for things like maintenance

You don’t want to have bad tenants as this can hamper all but the best investments. If you find out there have been things like multiple missed repayments, undue property damage or breaches of the lease in the past, this could be grounds for early termination of the lease agreement.

Which leads us to our next point.

What kind of lease agreement is in place?

When buying a tenanted property, the current lease will usually be one of two things:

  • A periodic lease

  • A fixed-term lease

If the lease is a fixed-term lease then it will generally have to be honoured and the current tenants will be allowed to stay there, even if you want to start fresh. There are of course exceptions to this: the current tenants may wish to vacate early with a change of ownership, or there may have been previous violations which are grounds for an early termination, but generally, you’ll need to let them see out the lease.

If the lease is periodic however (the less common lease type), then you can give the tenant 60 days notice to vacate, as long as you do so during the settlement period or before the purchase is complete.

How will you manage the property?

When buying a tenanted property, you’ll have to assume the responsibilities that come with being a landlord, which include:

  • Maintaining the structure and maintenance of the house

  • Maintaining the safety of the tenants

  • Ensuring all installations and utilities are working like gas, electricity and heating

  • Ensuring that rent is collected from the tenants in a timely manner

  • Conduct inspections to make sure the property is in a good condition

  • Abiding by all stipulations in the rental agreement

You may not want to do all this yourself, you may want to use a property manager, in which case you can either stick with the previous owner’s manager or you can find a new one.

Using the existing property manager might be better in the sense that they already know the property and have existing relationships with the tenants, but if you don’t like them, then finding a better one can not only make your life easier but can save you money as well. This strategy could also be useful if you have other properties that a different property manager takes care of and you want some consistency.

Landlords must inform the tenant and update these details on the lease if they decide to change property managers - another reason why keeping the existing one could be easier.

Is buying a tenanted property cheaper?

In many cases, buying a tenanted property can actually be much cheaper, as you might not have to pay the extra costs associated with finding new tenants, like advertising, or losing a few weeks or months worth of rent. If there are paying tenants already there, then you can jump straight in and start receiving a rental income.

There are some instances where it might not be cheaper. You might, for example, find out the property is currently undervalued, and in such a case you’ll have to go through the correct process of increasing the rent to reflect its current market value, which can take time. You might also be paying too much for a property manager, which as we discussed before you can switch out for a new one.

You might also not want to have tenants in the property at all: Say for example if you wanted to conduct extensive renovations on the property to improve its long-term potential. In such an instance having tenants can be an inconvenience as you’d most likely have to wait until the lease expires before you can provide them with notice to leave.

It all depends on the kind of investor you are and what your goals are.

How will you pay for the property?

To pay for the property, you’ll likely need a good investment home loan with a low interest rate and low fees to minimise your monthly repayments - a difference of less than 1% in a home loan interest rate can result in tens of thousands of extra dollars spent over the life of the loan, or hundreds of dollars each year.

To find a good value investment home loan, speak to one of our loan specialists today or check out our range of investment home loans to get started.

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