Are you thinking of buying a tenant-occupied apartment? While there are always some risks associated with rental property, such as the potential for damage or default, these can be mitigated by carefully screening tenants and maintaining the property in good condition. When done right, owning a rental property can provide a healthy return on investment and help you achieve your financial goals. Nevertheless, purchasing a tenant-occupied apartment comes with its own set of pros and cons, so read about the most important things to keep in mind before considering this purchase.
What is a Tenant-Occupied Apartment?
“Tenant-occupied” means that tenants live in the whole property. It must be a residential real property that serves as a tenant’s primary residence and falls under chapter 59.18 RCW, or it can be any building with four or fewer residential units that serve the same purpose.
Buying a house with tenants in it may be challenging for anyone, whether you’re an investor or just searching for a new place to call home. If you want to be ready for everything that may happen, you should familiarize yourself with the procedure and the rights of all parties involved. People serious about buying a home with tenants in it usually view the property as an investment. There are considerable financial benefits, but it is essential to make a well-informed decision after carefully weighing the pros and cons of the deal.
What are the Pros of Buying a Tenant-Occupied Apartment?
Security
The presence of people in a residence has been shown statistically to reduce the likelihood of vandalism and theft. That’s why having tenants rather than no one in an empty house is a plus.
Utilities
Utilities are typically paid for entirely by the tenant. In the case of a vacant property, however, the landlord is responsible for paying for everything. Some homeowners turn off their utilities to save money, although this is highly discouraged.
Appealing to Investors
It’s common for investors to be interested in purchasing properties that provide revenue. That is especially true if a fantastic tenant is already in place, is eager to remain, and is willing to pay a fair market rate for rent.
No Need to Find Tenants
In competitive rental markets, finding a tenant for your property may take a while and a lot of money. One benefit of buying an investment property with current tenants is that you won’t have to scramble to locate new ones. After some time as the property’s owner, you’ll have some time to prepare for the eventual vacancy in the event that the current tenants vacate at the end of their lease.
Generating Income
Getting immediate cash flow is the biggest perk of owning a rental property with tenants already in place. As soon as you take possession, you’ll start getting rent checks, automatically generating passive income. This removes the need to do a lot of advertising, process applications, and check the backgrounds of many candidates. That’s a money- and time-saver. You won’t have to deal with a new move-in because the current residents have been there for some time. They should be conversant with the area, and if you buy a property in good standing, you shouldn’t have any problems immediately.
There will be costs, even if the landlord doesn’t have a mortgage. Property taxes and insurance are mandatory payments that must be made regardless of whether a mortgage is in place. Selling an income-producing, tenant-occupied home is a significant win. Monthly expenses at the property can be covered with this money.
What are the Cons of Buying a Tenant-Occupied Apartment?
Difficult to show
Most tenants would rather not have uninvited visitors in their rented property. Therefore, they may impose insurmountable barriers on potential buyers and show unrealistic schedules. One such limitation could be requiring a notice period of at least 24 hours. Other restrictions could include making it so that a lockbox is not permitted or limiting the times and days the house can be shown. Showings must be scheduled with the tenant’s approval. Due to this, showing the property during their tenancy will be more challenging. The process will be less complicated if the lease allows for showings to prospective buyers and tenants during the lease term, but the fewer times the home is shown, the less likely it is that you will receive an offer.
Availability
There is probably a lease in effect, given that tenants occupy the building. The lease must expire, or the parties must agree to terminate the lease before the property can be sold. A buyer’s timeline might not mesh with the tenant’s desire to stay until the lease expires.
Uncertainty
A buyer can usually assume that a seller who lives in the property they are selling will leave when they sell it, but this isn’t always the case if the property is rented. Depending on the circumstances, some purchasers may be wary that the tenant won’t leave the premises in time for the closing. Some people are also worried about the state of the property when they move in. Would you say it’s dirty? Will they possibly steal stuff from the house?
Lease terms have to be honored
If you purchase a property with preexisting leases, you will be bound by their terms indefinitely. Depending on the specifics of the previous lease, this might not work in your favor as the new owner. The previous owner may not have written the lease to benefit you as the landlord. Before making a purchase, it’s essential to read over the lease.
Problematic tenants
It might be a significant hassle to buy a tenant-occupied home and get bad tenants immediately. A few of your renters may consistently be late with their rent payments, while others may cause costly repairs to your unit. Before buying such a property, it’s a good idea to check the renters’ payment history and credit reports to avoid dealing with a problem tenant. Buying a home that already has renters in it takes careful thought and research to ensure the purchase will be profitable.
Inherited Legal Risk
As soon as you make the purchase, you’ll be responsible for fixing any law violations on the property. Before purchasing, it’s essential to conduct a thorough inspection of the property and check the previous owners’ maintenance records, prepaid rent paperwork, security deposit documentation, and compliance with all applicable laws. Remember that if the prior landlord failed to meet their legal responsibilities to the renters, you might be held liable for their actions.
Challenging To Remove a Tenant
It’s essential to remember that a lease is a property right that runs with the land, not the person who owns it. The new homeowner is thus bound by law to comply with the lease’s conditions. In addition, you can’t just remove them if you buy the property to live there. If you want to move in, you won’t be able to until their lease is up. If you decide not to renew a tenant’s lease, you must give them appropriate notice in accordance with applicable law. It can be time-consuming and expensive to evict a tenant. Some states provide more rights to landlords, while others provide more rights to tenants. Removing a tenant who doesn’t pay rent or violates the lease terms may take time and effort.
Sum Up
Some real estate investors would benefit significantly from buying tenant-occupied properties since they would not have to worry about finding new renters. If you buy a house that already has tenants in it and want them to move out, so you can move in, you may not be able to do so based on the lease terms. So, it’s essential to know precisely what you want before you invest in a property that will be rented out.
If you’re looking for a financing option to buy a tenant-occupied property, you may want to consider a hard money loan from Lending Bee! Contact us today for a free consultation.