What Should You Do When Buying a Currently Occupied Rental?

When you buy a rental with tenants in it, their leases and security deposits come with the property. A sale does not end a lease: you must honor each one until it ends on its own terms, and you become responsible for returning each deposit. Before closing, check every signed lease against the seller's rent roll, have the deposits transferred to you, and, if you need a unit empty, make the seller deliver it vacant as a condition of the sale.

What do you take on when you buy a rental with tenants?

You step into the seller's place as landlord, with three obligations:

• Existing leases. A fixed-term lease keeps running to its end date at the agreed rent. A month-to-month tenant stays until someone gives a valid notice that ends the tenancy. You cannot raise the rent or change the terms mid-lease just because ownership changed.
• Security deposits. You will owe each tenant a refund at move-out, so you need the money and records from the seller.
• Local tenant protections. Rent control and just-cause rules that applied before the sale still apply after it. In San Francisco, for example, a new owner must tell tenants in writing, within 30 days of taking title, that they cannot be evicted or asked to move solely because of the sale, and that rent cannot rise above the city's limits because of the sale.

A verbal rent discount or a pet the seller allowed can also become your problem, so check for side deals before closing. For the property-level checks that come first, see what to look for in a rental property.

How do security deposits transfer when the property sells?

State law decides who owes the deposit after a sale. Four examples:

In practice, require the deposits to be paid to you or credited against the price on the closing statement. If the seller holds $1,500 on each of four units, that is a $6,000 transfer, backed by a written list showing each tenant's amount. Then move the money into the kind of account your state requires; see how to store security deposits.

How do you verify the rent roll before closing?

A rent roll is the seller's list of units, tenants, rents, and deposits. Check it against these documents:

1. Get every signed lease, rental agreement, and amendment. Compare each one to the rent roll: tenant names, rent, end date, deposit, and who pays which utilities.
2. Ask for proof the rent is paid. Request bank records showing recent rent deposits for each unit and a list of any tenant behind on rent. If you plan to count the rent to qualify for a conventional loan on an investment property, Fannie Mae lets the lender use an existing lease that transfers to you, but the lender must confirm it is in effect, generally with the two most recent months of bank statements or electronic transfers showing that rent.
3. Ask each tenant to sign an estoppel certificate. This is a short signed statement in which the tenant confirms the rent, deposit amount, lease dates, and any side agreements. It can surface a deal the seller made outside the lease.
4. Ask about open problems. Get written answers on pending evictions, notices already served, repair requests, and complaints filed with a city agency.
5. Put the seller's answers in the purchase contract. Have the seller state in writing that the rent roll, leases, and deposit amounts are accurate and that no other agreements exist, with a right for you to cancel if they are not.

When should you require the seller to deliver a vacant unit?

Ask for a vacant unit when you plan to live in the property or want to choose your own tenants. Make it a condition of closing and leave the notice and move-out negotiation to the seller, who is the landlord until closing. Whether the seller can lawfully deliver it in time depends on the lease and on state and local law:

• Fixed-term lease. The seller generally cannot end it early. The tenant can agree to leave, often in exchange for a cash payment, but cannot be forced out before the end date without a legal ground. See how leases and rental agreements differ.
• Month-to-month tenancy. The seller can end it with the notice state law requires, if no just-cause rule blocks it. For general notice rules, see how to end a month-to-month rental agreement.
• California. The usual notice is 60 days for a tenant of a year or more and 30 days for a shorter tenancy. Under Civil Code section 1946.1(d), the seller can use 30 days' notice if the unit can be sold separately, escrow is open with a buyer who is a natural person and intends to live there for at least a year, and the notice goes out within 120 days of opening escrow. But once a tenant has lived there 12 months, the state's just-cause law covers the unit unless an exemption applies, such as a single-family home owned by an individual whose lease includes the required exemption notice. That law does not list a sale as a reason to end a tenancy, and its owner move-in reason applies to leases signed on or after July 1, 2020, only if the tenant agrees in writing or the lease allows it. For covered tenancies, owner move-in is unavailable if a similar unit on the property is already vacant and available to the intended occupant. The owner or qualifying relative must move in within 90 days after the tenant leaves and use the unit as their primary residence for at least 12 consecutive months. No-fault terminations require one month's rent in relocation help or a written waiver of the final month's rent.
• Oregon. After the first year, a landlord can end a month-to-month tenancy with at least 90 days' notice after accepting an offer from a buyer who will live in the unit as a primary residence. The notice must include written evidence of the offer, and a landlord who owns more than four units must pay the tenant one month's rent when serving notice. The landlord can shorten the notice period to 60 days by paying an additional month's rent when serving notice, beyond any otherwise-required relocation payment.
• Rent-controlled cities. Local ordinances can bar ending a tenancy because of a sale at all, as San Francisco's does.

If the tenant does not leave and the seller has to file an eviction, closing can be delayed until the case ends. Leave room in the closing date, or keep a right to cancel if the unit is not vacant on the agreed day. If the property is a foreclosure, federal law adds its own notice rules for tenants; see buying a foreclosed property.

How do owner-occupant loan rules affect closing?

FHA loans for 1 to 4 unit properties require at least one borrower to move in within 60 days of signing the mortgage and to intend to live there for at least a year. If you sign on March 1, you must be living there by April 30. If every unit has a lease running past that date, or a tenant who cannot lawfully be removed in time, you cannot meet the requirement. In California, for example, owner move-in after closing means at least 60 days' notice to a tenant of a year or more, which leaves no time to move in within the 60-day window.

Before you make the offer, confirm that at least one unit will be empty at closing, or that a lease ends within your move-in window and the tenant has agreed in writing to leave. If you use another type of owner-occupant loan, ask your lender what move-in deadline its loan documents set, and match the vacancy date in the purchase contract to it.

What should you do with the tenants you keep?

Send each tenant a letter at closing with your name, contact information, where to pay rent, and the deposit amount you now hold. In Texas, sign it and state that you acquired the property, that you are responsible for the deposit, and its exact amount, which meets the state's notice rule. If you later decide to replace some tenants, give notices one unit at a time so you are not carrying several vacancies at once with no rent coming in.