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 house with tenants.
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?
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
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.
Which leads us to our next point.
When buying a tenanted property, the current lease will usually be one of two things:
A periodic lease agreement
A fixed-term lease agreenent
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.
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.
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.
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.
Selling a rental property while you have tenants in place can also be quite tricky. One advantage is that you'll still be receiving rental income from your tenant while your investment property is on the market. On the other hand when selling with a tenant, you don’t have control over how you want the property to look to potential buyers.
Things to do when selling your investment property with tenants
You should inform your tenant of your intention to sell the property as soon as possible. Being open and honest with them will make them more likely to cooperate in return.
Selling the house can be an ordeal for your tenant. The burden of making sure the house is neat and tidy is their responsibility and they may also need to look for another place to rent. So for their troubles, you can give them some form of compensation. It is not uncommon to offer them a rent discount. Some landlords even offer free rent for a week or two during the sale period.
When it comes to house viewing and inspection, the law in most Australian states requires that tenants are given written notice of at least 24 hours before showing the property to potential buyers.
If you’re considering asking your tenant to leave because you want the property vacant, it’s imperative to understand your lease. You must comply with the legal requirements when giving a ‘notice to vacate’ according to your state’s legislation. These are as follows:
Talk with your agent or your property manager to ensure a smooth selling process not only for you but to also for your tenant.
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.