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For a complete guide on everything you need to know about buying a tenant occupied property, keep reading.
With more than 10.6 million people claiming income from rental properties, buying a house with tenants sounds like a quick way to build your real estate investment portfolio with a cash flowing asset. However, when you’re buying a tenant-occupied property you need to understand the nuances of purchasing this type of investment, and be aware of the advantages and disadvantages that come with it.
Before investing in a house that has tenants living in it, people should know that the rental lease agreement is connected to the property, not the previous property owner. Legally binding documents such as leases, easements, and covenants that run “with the land” remain in effect regardless of who the current owner is. Everything from the rent price and requirements to the eviction clauses will remain unchanged until the current lease ends.
In this guide, we’ll go over the financial and legal implications, and how to navigate the process to make the best informed decision.
What You Need to Know When Buying a House With Tenants
Landlord Obligations
As a rental property investor, when you buy a house with renters living in it, you become the landlord. Legal requirements and building codes vary by state and county, but in general, it is your responsibility to keep making sure that the tenants have a safe place to live according to the standards set by the state, county, and city where the property is located. The “implied warranty of habitability” is a standard part of tenant-landlord rules in almost all states.
So, what are the bare minimum conditions for a habitable property? Here are the basic categories that are usually covered.
- Structure: A landlord must keep basic structural elements such as the roof, walls, stairs, and foundation intact and safe for the tenant.
- Common areas: For multi-family properties, any common areas such as yards, hallways, stairwells, parking spaces, and the like must be kept clean and usable.
- Systems: All systems are to be kept functional for the tenant, including electric, plumbing, HVAC, and waste systems.
- Water: The landlord is responsible for providing cold and hot running water, within reasonable parameters (e.g., a shortage of hot water after multiple showers in a row isn’t a hardship).
- Environmental Dangers: The landlord is responsible for removing any potentially harmful materials, such as mold, asbestos, and lead paint.
- Safety: Reasonable protection from criminal intrusion must be provided.
- Vermin: Extermination of pests and rodents is required.
Tenant’s Rights
The renter has the rights listed in the lease, in addition to the rights mentioned above. So, even after a change in ownership, the landlord’s responsibilities under the lease, such as paying for utilities or maintaining the lawn, must be upheld until the end of the lease period.
It is very important to go over the current lease terms when buying a property with tenants. Tenant rights include the following, which may be relevant to buyers and new landlords:
- Right to the security deposit: Upon move-out, the tenant should receive their security deposit back, assuming all standards in the lease have been met. (Buyers should be sure to get this from the seller at closing.)
- Right to vacate in 30 days: Even if the lease contains a termination clause (see below), the tenant is still usually given up to 30 days to vacate the property after the sale.
- Right to receive on-premises notices: Landlords do not have the right to access the premises without notice. Tenants must be given 24-48-hour notice for all appointments, including inspections, repairs, showings, etc.
- Right to receive vacancy notice: Often, landlords are required to give tenants written notice (30 or 60 days) prior to the date their lease expires and they must move out. Laws differ by state.
- Right to original lease addenda: As with lease terms, addendums (such as a pet addenda or a roommate addenda) stand when ownership changes hands.
- Right of first refusal: Some states allow tenants to match a buyer’s offer to purchase the home.
Your Options When Buying an Investment Property with Tenants
Depending on the circumstances, the lease contract, and everyone’s goals, there are a few things to think about when buying a house that already has tenants.
Keep the Tenant in Place
A tenant-in-place is something that some investors consider to be a benefit of the purchase. There are some benefits to getting instant cash flow right away without having to deal with vacancies, replace tenants, or screen new tenants.
With that said, you’ll still want to conduct due diligence if you’re thinking about renewing the current tenant’s lease because not all tenants are reputable, unfortunately. It’s a good idea to get detailed information about their background before making the final choice.
It’s generally a good idea to send the tenants a Landlord Introduction Letter to introduce yourself and any changes that you might be implementing. It will also help build a relationship with the renters and line of communication with them, which is important.
What Should I Ask the Seller For When Buying a House With Tenants?
Ideally, the property owner should provide you with the majority of this information before you submit your offer, but some, such as the deposit, will be delivered at closing.
- The executed lease agreement and all addenda
- Copy of the current tenant’s credit report and background check
- Proof of on-time rent payments for as many months as possible
- Expense sheets to see if the current rent will cover your expenses
- Condition sheet from when the tenants first moved in
- List of items that stay with the property when the tenant moves out
- Security deposit and any interest due to the tenant (if applicable)
Add a Contingency to the Offer
A vacancy contingency can be added to your offer in case you decide you don’t want to buy the house if the current tenant continues to live there. Basically, you condition your offer on the seller getting rid of the renter ahead of the sale. That means it’s up to the current owner to either break the lease (and pay any fees), give the tenant a reason to leave early, or evict the renter if they can legally do so.
Terminate the Lease
Some leases include a clause that ends the deal if the property is sold. As a result, the tenant usually has a certain amount of time to move out of the house when it is sold. You can take legal action if they refuse; it’s a breach of the lease agreement.
While some leases have an early termination penalty language, both the landlord and the tenant can end the lease (with proper notice), but they will each have to pay a fee—usually two to four months’ rent. However, each state has their own landlord-tenant laws, including when a tenant can break a lease. You can read up on them here.
Offer an Incentive for Early Termination
Sometimes, landlords will pay tenants to leave before the end of the lease, even if the lease doesn’t have an early termination clause. This is known as a “cash for keys” or “tenant buyout” deal. While “cash for keys” deals are not illegal in any state, the specifics may vary depending on where you live.
Unfortunately, tenants can always say “no” to a cash for keys offer, so investors are never sure if it’ll work and the property will be vacated. If you want to offer tenants this sort of incentive, you should make a deal before the sale is finalized.
Pursue an Owner Move-In (OMI) Eviction
Owners have the right to lawfully evict tenants in certain areas if they or a close family member intend to live at the property full-time. If the renter has followed the rules of the lease, this is called a “no fault” eviction.
However, in order to safeguard the tenant, evictions from OMI are subject to constraints on the burden of proof. It usually implies that the owner or relative has a set length of time (usually 60 or 90 days) to start occupying the property and then stays there for a specific amount of time (usually 1 to 5 years). Real estate attorneys can help buyers avoid legal trouble, as tenants may have a case for unlawful displacement if the rules aren’t followed.
Pros and Cons of Buying a House With Tenants
An investor should think long and hard about the benefits and drawbacks of purchasing a property with tenants. Buying a home is never without risk, but when you factor in tenants, the risks are considerably higher.
Pros:
- Instant Rental Income: Buying a house with tenants who pay on time is a great way to ensure instant cash flow—you gain a return on your investment from day one. In fact, if you close in the middle of the month, you should receive prorated rent from the property owner for the number of days you own the home.
- No Need to Find Tenants: Finding and vetting tenants can be costly and time-consuming. Plus, while you do showings and screenings, your property sits vacant, which means no rent is coming in. With a tenant in place, you avoid that hassle and loss of rental income.
- Proper Maintenance Up-to-Date: Assuming the previous owner has kept up their obligations as a landlord, you can be relatively certain that the property is in acceptable condition. However, make sure you assess the property’s condition and don’t take anything for granted.
- A Built-in “Expert” Every house has its quirks, from the out-of-place switch that powers the porch light to the one squeaky floorboard in the dining room. An in-place tenant has discovered all the nuances of the property—and of the neighborhood, for that matter. If you’re lucky, they’ll be the ones to clue you in about what needs to be done in a frost and who to become friendly with on the HOA board.
Cons:
- Unappealing Lease Terms: The previous landlord may have included or omitted items in the lease that could put you in an unfavorable position: pets, smoking, subleases, under-market rent, etc. When it comes time to renew, you can always change the terms, but up until then, you must abide by the current agreement.
- Problem Tenants: When it comes to in-place tenants, you don’t know what you don’t know. A renter could look really good “on paper” yet still be hard to deal with. The tenant may have developed some less-than-ideal habits, like middle-of-the-night maintenance calls or repeatedly annoying neighbors with early-morning drumming. As a new owner, it could be difficult to establish new norms with established tenants.
- Inherited Maintenance Issues: Remember, the legal obligation to create a safe and habitable living environment falls on you as the landlord. Sometimes the current condition of the home could have some underlying issues. That means any backlog of maintenance requests is now your responsibility.
- Eviction Woes: Even if the tenant seems lovely, a new renter-landlord relationship has the potential for disagreements or misunderstandings that can turn things sour quickly. The tenant may retaliate by causing damage or withholding rent payments, causing the agreement to spiral downward toward eviction. But eviction is a long, costly, and difficult process that no landlord wants to go through if they can help it.
Where to find Tenant-Occupied Houses for Sale?
Although it’s a lot easier to find and buy a vacant rental property, there are a few options for finding a tenant-occupied house for sale.
1. Websites for Turnkey Tenant-Occupied Real Estate
Although there are plenty of sites like Zillow that use the MLS( Multiple Listing Service) to show publicly listed properties for sale, there are some other websites specifically for turnkey rental properties–some of which offer properties that are tenant-occupied.
These sites include (but certainly not limited to):
2. Word of Mouth
Networking with other investors and real estate agents is a great way to find rentals with tenants. But you don’t have to stop there, either. You can use social media or talk to people in your social circle to put the word out that you’re a real estate investor and you’re looking to buy a tenant-occupied property.
3. Zillow
It’s pretty well known that Zillow lets you buy, rent, and sell homes. However, you might be shocked to learn that Zillow also lists tenant-occupied rental homes for sale. There could be anywhere from a small handful to over a hundred properties for sale, depending on the area you’re looking.
You can find these properties by doing the following:
- On Zillow’s main page, click on “Buy” and then choose “Homes for Sale.”
- Enter the neighborhood, city, state, or region you want to invest in.
- In the right top corner, there’s a “More” box. Click on that and scroll down until you find “Keywords.”
- Type in “tenant occupied property” and hit enter.
- Voila! You can now browse through the properties.
4. Property Management Companies
Sometimes, local property management agencies know which homes for sale already have renters. The property manager might be able to connect you to an investor who’s thinking about selling their property but hasn’t pulled the trigger yet. Plus, if the property manager holds a real estate license, they can help facilitate and finalize the entire transaction.
5. Multiple Listing Service (MLS)
If you’re working with a real estate agent, they’ll be able to access the MLS–a database full of real estate listings of all types, be they single-family residences, multi-family units, and even commercial properties.
With so many listings, it might be extremely difficult to find tenant-occupied properties on the MLS. Most of the listings are geared toward people who want to live in the properties they buy. However, it’s quite common to find detailed listings that clearly state the property is tenant-occupied, which can simplify the whole process significantly.
Tips for Buying a Tenant-Occupied House
It is most likely that you will come across a house for sale with current renters if you are an investor seeking to buy an investment property. Both single-family and multi-family homes usually already have renters. It would be wonderful to start collecting rent the moment you buy an investment property, but there are several things you should know before doing so if the tenant already lives there. These are some things to think about while doing your due diligence.
1. Screen and Vet the Tenants
Having renters who haven’t been checked out properly can be a nightmare because they won’t pay their bills, damage your properties, and make the eviction process take too long. But when you take over a tenant that already lives there, you have to rely on the tenant screenings done by the former landlords, which may not be very good.
The current landlord may have accepted anyone, even if they didn’t meet the requirements. On the other hand, they may have had a long-term tenant who didn’t pay rent on time or at all.
Tip for landlords: some sellers may try to sell their house to transfer their unresolved tenant issue to an unwary buyer.
2. Inspect the Property Thoroughly Before Buying
Look around and see for yourself how well the tenants take care of the property. This is the landlord’s job to make sure the property is in good shape, but see how the renters treat it every day.
Find out from the seller whether they filed an insurance claim as a result of the tenant as well. Has there been any damage or accidents that the tenant caused that required the seller to make a claim? If a property has a history of multiple claims, it may be more difficult for you to obtain affordable insurance for the property if and when you finalize the deal.
3. Ask the Tenants to Sign a New Lease
Should you decide to make any changes to the property or the rental terms, have the renters sign a new lease. Rent, lease period, and other tenancy terms and conditions may be subject to change.
Having said that, unless the tenants consent to new lease agreements, the you’re obligated to honor the existing tenants’ valid leases. In other words, you can only end the current leases and make the renters sign new ones if they agree.
Instead, you can let the renters choose between signing new leases that reflect the changes you intend to make and continuing to rent under the terms of their current leases. The terms and conditions of the new leases will apply to the tenants if they consent to sign them, and you will have the authority to implement the adjustments that you’ve made.
But let’s say the renters don’t want to sign new leases. Then you have to keep following the rules of their current leases until you can come to an agreement with the tenants that works for both of you. It is wise to seek the advice of a real estate lawyer before requesting new lease agreements from current renters.
4. Talk to the Previous Landlord
Generally speaking, it’s wise to speak with the previous landlord before making a decision. The former landlord can offer valuable details about the rental property and the renters; this should include the tenants rental record and whether there are problems or difficulties you should be aware of.
Talking to the previous landlord can teach you a lot, but it can also help you and the renters get along famously and make the move go off without any issues. If there are any problems or misunderstandings, the former landlord can help you figure out how to handle the sale and the leases of the current tenants.
You might ask the former landlord to speak with you over the phone or in person to go over the rental property and the renters. To be sure you get the information you need, consider making questions to ask them. Have an open mind and take what the former landlord has to say to hear; they’ve been dealing with this property, the tenants, and everything that goes along with it. The better you understand the rental situation, the property, and the tenants, the smoother the transition should be for everyone involved.
5. Make Sure the Security Deposit Is in the Settlement Statement
Check the settlement statement again to make sure the security deposit shows in there as well; you should get it when you buy the house. Do not worry about the amount that is being collected as long as it does not go over the allowed limits in your area. If the lease talks about a deposit or prepaid rent, you should get the money and records for it.
Verify the balance of the security deposit. Is that the maximum amount allowed where you live? Landlords may agree to a smaller security deposit if the space is rented quickly. It’s possible that tenants who have less to lose will be less inclined to spend time taking care of the house.
6. Have the Proper Insurance Coverage Required for Landlords
Anytime you decide to take over a lease, you ought to have landlord insurance that covers responsibility. When the property closes, the new owners are responsible the moment the contracts have been signed and the deal is finalized. You should get landlord insurance for every rental property you buy so you won’t have to worry about paying for repairs or facing legal action in the event of an accident on the property.
7. Understand About Local Landlord/Tenants Laws
If you’re buying a rental property in a new city or state, it’s imperative that you fully understand the local landlord/tenant laws because different areas have different laws. A good first step is to work with real estate attorneys or local property management companies to make sure you’re following all local and state rules is a great idea.
That said, you can do some preliminary research on sites like:
Of course, your best course of action is looking up state specific landlord/tenant laws by googling “landlord/tenant laws in (whatever state).”
8. Know When You Can Raise the Rent and By How Much
As long as the lease is still in effect, the rules agreed upon with the previous owner will still apply. So, you can’t increase the rent until the first lease term ends. It’s best to let the tenant know about a rent rise a few months before the end of their lease, though. The tenant will then be able to decide whether to move out of the house or stay in it at the new rent price.
What’s the Easiest Way to Find and Purchase a Rental Home?
Finding a house with tenants in place might be as simple as doing an advanced search for “tenant occupied” on your favorite real estate listing website. But as the saying goes, not everything that’s simple is easy. Often it takes more investigative research and deep dives into several investor-friendly databases to come up with potential properties that fit your situation and local area.
That’s where our team at New Western can help. Our professionals will find available rental houses for you by accessing lesser-known sources and utilizing creative methods. We can also help you analyze the numbers so you can better know if the deal is right for your portfolio. If you decide that buying a house with tenants is right for you, we’re here for you every step of the way.
