Buying a Property with Tenants: Pros, Cons, and Rules for Landlords

The Big Picture On Buying A Property With Tenants:

• • Buying a property with tenants provides immediate cash flow, as there is no vacancy period while seeking renters. However, it also includes the risk of inheriting tenants whose habits and payment histories may not align with the new owner’s expectations. 
  • The existing lease agreements carry over when you purchase a property with tenants, which means that the terms, including rent amounts and lease durations, cannot be changed until these agreements expire.
  • Prospective buyers should thoroughly screen existing tenants and inspect the physical condition of the property, similarly to how they would evaluate a vacant property. This includes reviewing the rental history, existing damage or maintenance issues, and the legal compliance of lease terms.

It doesn’t get any more “turnkey” than buying a property with tenants already renting it. That’s why buying a property with tenants present several notable advantages, like immediate cash flow and little to no startup work. 

But that doesn’t mean buying a property with tenants doesn’t come with its own risks. The tenants and former landlords have their own ways of doing things that may differ from yours. The transition to a new landlord marks an adjustment for everyone but often becomes a lucrative investment for buyers.

Before you invest, make sure you know what to look for in your inherited tenants and the pros and cons of buying a home occupied by tenants from the start.

Implications of Buying a Property with Tenants

When you buy an investment property, it’s usually vacant. Investors often have to fix it up to make it rent-ready for tenants.

Some properties, however, sell with tenants living in them already. This means several things for you:

However, like any investment, you have to conduct your own due diligence. Don’t assume the property is in good condition or that the tenants are reliable. Confirm for yourself if the property is a good investment and that the tenants are respectful, low-impact, and consistent in paying their rents.

The Lease Agreement Survives the Sale

When you buy a property with tenants, you inherit the lease agreement signed with the old landlord. That means you can’t change the lease terms or rent prices, or kick out the inherited tenant. At least not until the least contract comes up for renewal. 

At that point you can sign a new lease agreement with the tenant, to raise the rent or update other lease terms. Or not — in most states, you can non-renew the renter if you’d prefer to find a more reliable or lower-impact tenant. Just bear in mind that every state requires a different amount of advance written notice before the lease term ends, if you plan to raise the rent, non-renew the lease, or update other leasing terms. 

The only exceptions to the tenant rule would be if the lease specified that the seller had the right to terminate the lease upon selling or transferring the property.

Before you buy a property with tenants, remember to check the lease term. Because the lease contract, like a lien, comes with the property.

Where to Find Turnkey Properties with Existing Tenants

Finding properties with tenants often proves a little more difficult than finding vacant properties, but here are a few places to look:

• • Zillow – Filter your search for the area you want to invest in and type ‘tenant occupied’ in the keyword section to find homes with tenants.
  • Property management companies – If you network with others in the industry, check with property management companies to see if they have any investors looking to sell.
  • Word-of-mouth – Networking with people in the industry and outside of it may turn up tenant-occupied properties for sale.
  • MLS listings – Using a real estate agent, you may find tenant-occupied properties listed on the MLS.

(article continues below)

Real estate investments? Awesome. Being a landlord? Less fun.

Learn how to earn 15-30% on passive real estate investments in one free class.

What Should Landlords Watch Out For?

Buying rental property with existing tenants brings a whole new set of issues to the table. Not only should you worry about the property condition and value, but you have to worry about the quality of the tenants too.

Keep the following in mind as you review the rental agreement and tenants.

Legal, Protective Lease Agreement

Let me give you a short example.

Let’s say you bought the property without doing your due diligence (shame on you) and you found out that the old landlord had some pretty questionable terms in the lease. Things like waiving tenant rights, excessive late fees, charging too much for applicant screening, unreasonable restrictions, or any clause that runs contrary to local, state, and federal laws.  

To add to your woes, you find out about it a few months after you bought the property, and have already onboarded new tenants with the old lease agreement. Congratulations, you are now on the hook for a potential lawsuit. 

That’s why it is of the utmost importance to read the lease agreement and/or have your attorney review it. Does it comply with local and state landlord-tenant laws? Are the terms fair to you and the tenant?

Verify the current lease meets all local tenant laws. Review it with your attorney so there aren’t any unpleasant (and expensive) surprises once you own the home.

Screen Existing Tenants Thoroughly

Screen the tenants as if they were applying anew. You have the right to review the tenant’s rental application, credit report, background check, and all other screening measures the seller took when the tenants first applied.

Also verify their payment history and performance as renters. Do they cause the current landlord headaches? Ask as many questions as possible and ask for proof of the tenant’s payment history, rather than taking the seller’s word for it.

Also check for pets, both authorized and otherwise.

Inspect How the Tenants Treat the Property

See for yourself the condition the tenants keep the property in and how they care for it. Even though maintenance and repairs fall under the landlord’s responsibility, get a sense of how the tenants treat the property on a daily basis.

Also ask the seller about any insurance claims they made because of the tenant. Have there been any accidents or other tenant-caused reasons the seller had to file claims? Too many claims on a property could make it harder to secure (affordable) insurance yourself.

Verify the Security Deposit

The security deposit should transfer to you when you buy the property, so double check that it appears on the settlement statement. Make sure you feel comfortable with the amount collected, and that it doesn’t exceed local limits. If the lease mentions prepaid rent or any other deposits, ask for the money and receipts.

Check the security deposit amount. Is it the full amount allowed in your area? Some landlords accept a lower security deposit to fill the space. Tenants may be less likely to take care of the place with less to lose.

Pros of Buying a Property with Tenants

Buying a rental property with existing tenants comes with plenty of perks!

• • Immediate cash flow – You don’t have any lag time between buying the property and collecting rent. You start earning immediate cash flow, which helps offset the rental property mortgage right away. Immediate cash flow also means that you are closer to reach ROI than if you started from scratch. 
  • Habitability & compliance – If the home currently has tenants, it should theoretically meet local codes. Never assume, though; hire a home inspector ensure the property is up to both your and the city’s standards before you invest in it.
  • No major renovations necessary – You won’t have to invest money immediately into rehabbing or repairing the home. If tenants already live there, the home should be in livable condition, again in theory.

(article continues below)

Want to compare investment property loans?

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Cons of Buying a Property with Tenants

• • You must rely on the current landlord’s tenant screening – Taking on a bad tenant is not a good investment, but you must rely on the landlord’s screening process. Get as many details as you can regarding how the landlord screened the tenants to make sure they are a good fit for you.
  • You’re stuck with the current rent – You can’t modify the existing lease, which means you must accept the current lease terms, including the rent. If the current landlord didn’t increase rents annually, this could leave you with unruly tenants not accustomed to annual rent hikes. Your profitability can also take a hit if the current rent is way below the average market rent, which can make it longer to reach ROI. 
  • Legal risk – Just because the home has tenants doesn’t mean the landlord follows the law. If there are issues with the home meeting specific codes, it could cost you more money fixing the home and/or dealing with legal battles.

Ways To Mitigate Risks Of Buying Properties With Tenants

To avoid the potential headaches that come with buying properties with existing tenants, landlords should implement the following steps:

What You Need To Provide To Tenants From The Onset

As the landlord, you take on the following immediately after taking possession of the property:

• • Provide the tenants with running water and proper HVAC systems;
  • Ensure all electric and plumbing systems are safe;
  • Make sure the property is free of harmful toxins, including asbestos;
  • Keep all common areas clean and safe;
  • Make sure all foundational structures, including stairs, walls, and flooring, are safe.

Is Buying a Property with Tenants Right for You?

Buying properties with existing tenants can provide many advantages, but it could also quickly turn into a headache.

So, do your due diligence and collect as much information as possible about the tenants and the property to ensure both perform well. The ready-to-go rental home with renters saves you the time and hassle of finding renters, a welcome perk for long-distance investors and hands-off investors.

But occupied properties can just as easily stick you with bad tenants who never pay rent on time or abuse the property. Whether you buy a property with existing tenants or a vacant unit, you still need to screen the tenants before moving forward.

 Also, you don’t have to wing it. You can ask for professional advise if you need to. You can also utilize our free tools like ROI calculators,  and rental application platform, or utilize our tenant screening solution to make your life easier. 

Remember, whatever money you spend on prevention will be infinitely less than what you’ll need to fix a future problem. ♦

Are you looking to buy a rental property already leased to tenants? Why or why not?

More Real Estate Investing Reads:

I want to know more about…