What happens if you buy a house with tenants?
If you’re buying an investment property, the current tenants will most likely be retained once you complete the home purchase. To avoid complications, you must know your rights and responsibilities as a landlord before buying a house with tenants.
Ask the seller the following questions:
- Who are the tenants?
- What kind of lease agreement is in place?
- How do you currently manage the property?
For those buying a house to use as their residence, ensure that the seller has provided tenants with the necessary notices.
What happens to a tenant’s lease when the property is sold?
It depends on the type of lease the tenant has.
When buying a tenanted property, the current lease will be one of the following:
- A periodic lease agreement
- A fixed-term lease agreement
If a tenant has a periodic lease, the landlord can usually provide a 60 days notice for them to vacate. Discuss the specifics with the seller to ensure they’ve sent out the appropriate notices to the tenants.
A tenant with a fixed-term lease, on the other hand, has a right to stay until the end of their lease. This means their lease follows the property and the new owner will become their landlord. An agreement between the new owner and the tenant will be documented to reflect the change in property owners.
The current tenants with fixed-term leases may wish to vacate early due to the change of ownership. Or there may have been previous violations which are grounds for early termination, but generally, you’ll need to let them see out the lease.
What happens to the tenant’s bond when the house is sold?
The tenant’s bond will remain with the Bond Authority until the end of their tenancy. The property owners, both previous and new, must contact the Residential Tenancies Bond Authority about the sale of the property. If you’re buying a property with tenants, you must notify the Bond Authority immediately about the change in ownership.
What should you do with existing 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 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 do they pay rent on time
- How many problems they’ve caused, if any
- How reasonable are they when making maintenance requests
When it comes to investment properties, choosing the right tenants is an important factor. 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.
How do you manage a property with existing tenants?
When buying a tenanted property, you’ll have to assume the responsibilities that come with being a landlord such as:
- 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
If you want to use a property manager, you can either stick with the previous owner’s manager or you can find a new one. Using the existing property manager may be better as they already know the property and have existing relationships with the tenants.
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 be much cheaper, as you might not have to pay the extra costs associated with finding new tenants. You don’t have to worry about advertising or losing a few weeks or months' worth of rent due to vacancies. You can jump straight in and start receiving a rental income with a tenanted property.
There are instances when a tenanted property can cost you more. For example, if a property is undervalued, you’ll have to go through a long process of increasing the rent to reflect its current market value, which can take time.
If you’re eyeing extensive renovations to improve the property, having active tenants can hinder construction plans. You’d likely have to wait until the lease expires before you can do anything about it.
Are there additional costs to buying a house with tenants?
Moving forward, you’ll be responsible for the maintenance and upkeep of the property. If the tenants come up with issues that you or the previous owner weren’t aware of, this may add to the costs of buying the property.
Other additional costs may include hiring a property manager. Although, you can always choose to manage the property yourself to save costs.
How will you pay for the property?
To pay for the property, you’ll need a good investment home loan with a low-interest rate and low fees to minimise your monthly repayment. 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 loans.com.au’s range of investment home loans to get started.
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