What Should You Do When Buying a Currently Occupied Rental?
It’s common to find a rental property still occupied by tenants when it is being sold. The current lease terms and your need to occupy the unit will affect how you handle this situation. Below are some key points that should guide most landlords through the process and help you avoid the typical pitfalls in buying an occupied unit:
Gather information about current tenants and lease terms: First, before buying any occupied rental property, you should find out what type of tenancy it is, whether the tenants have monthly rental agreements or fixed-term leases. If it’s a long-term lease, you should find out when it will expire. You will want to get copies of the leases or rental agreements and read them carefully, because you are required by law to honor any existing leases. It is especially important to find out the deposit amounts and where these are being held. You should also find out if all rents have been paid or if any tenant is late and in arrears. Before making a definitive offer, you will also want to visit the property several times to see if there are obvious tenant problems, such as property damage. Try to be wary of any less obvious tenant problems as well, such as frequent neighbor complaints about the tenant’s noise or disturbances. You want to understand what you are buying: a healthy rental operation with respectful tenants or a problematic and energy-consuming rental situation. Plus, if you already have good tenants in place, you will save a lot of time and money by not having to search for new tenants. However, keeping a bad tenant isn’t worth the effort. If you seem to run into a bad tenant, you will want to check out termination rules in your state (as well as any local rent control rules that may limit your ability to terminate a tenancy). If you can have the seller deliver a vacated unit, it’s even better.
Decide if and when you plan to move into the rental property: Many landlords are interested in buying duplexes or fourplexes for their rental properties so they can live in one of the units. In addition, some popular loan programs, such as Federal Housing Administration’s loans for residential property with 1-4 units, require the buyer to occupy the property within 60 days of purchase. If this is the case, you will want to confirm with the seller that there will at least be one empty unit you can move into by closing time or shortly after. If you are not sure about the rules on buyer occupancy, you should talk to your lender to find out. If the seller cannot deliver a vacant unit for you as discussed earlier, this could create a problem for closing, particularly if your financing plan requires you to gain occupancy. In that case, it may be wise for you to find another property or ask the seller to contact you when one unit becomes vacant.
Request your seller to deliver a vacant unit: If you do need to move into the property you are buying or if you just want to start with a clean slate and choose your own tenants, you should condition your offer to buy on the seller vacating the property before the closing. Of course, if would be easier and most feasible if the original tenants had a month-to-month rental agreement. Alternatively, the seller who is eager to sell may be motivated to buy out an existing tenant or try to evict a problematic or unpaid tenant. It makes sense to put the burden on the seller to empty the unit. The seller has the right and knows best how to notify or remove the existing tenant because the seller has the greatest incentive to make the transaction happen. Keep in mind that if the seller needs to evict an existing tenant, you may need to reserve additional time for closing (for example, 60 or 90 days).
Cycle out existing tenants gradually: If you have decided to get rid of all the existing tenants inherited from previous owner, you may not want to give them termination notices at the same time. A good practice, especially for part-time landlords, is to replace the tenants over time. For example, you can let the tenants go according to the natural lease expiration date or by giving termination notices to monthly tenants one by one. This will help avoid the situation where multiple units become vacant at the same time and you have the pressure of finding multiple tenants. In addition, having a fully vacant property means you are not receiving any rent to help you pay your mortgage or property expenses.
If you decide to buy an occupied rental, you should gather all the information you can. You can ask the seller to deliver a vacant unit and you may need to gradually cycle out the inherited tenants.
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