3 Factors to Consider with a Tenanted Property
Purchasing an already-tenanted property can be a good thing or a bad thing. Pros include immediate cash flow, higher net profits, and possibly lower risk. On the flip side, inheriting tenants can also prove more risky, because you really don’t know what you’re getting into, tenant-wise. You didn’t screen the renters, you didn’t agree to the lease terms, so it can feel kind of like a crapshoot.
That’s why it’s important to protect yourself before completing any deal that involves a tenanted property. There are 3 primary factors you must consider. If you fail to examine these areas, it really will be a crapshoot, and chances are it won’t turn out in your favor.
A tenant’s payment history can reveal a lot about them. Have they consistently paid on time, or have they been late on several occasions? Do they always pay in full? If there have been issues with paying the rent in the past, I can guarantee that you’ll be dealing with those same problems once you take ownership. However, payment problems don’t necessarily mean you should walk away. Before making a decision, talk to the tenants and get their side of the story to see if it matches what the seller is telling you. If there’s a discrepancy, try to get to the bottom of it to find out what’s really going on. Also, implementing late fees (if this hasn’t been done already) is a strong motivator for on-time payments, so that’s something to consider as well.
You should also be looking into the condition of the property to see how well the tenants are taking care of it. If they’re trashing the place, you’ll want to know. Any repairs or other problems will be coming out of your pocket, unless you’ve already worked something out with the seller. If the tenants aren’t treating the property how you believe they should, then you need to ask yourself if you’re ready to deal with the time, stress, and expense of cleaning up their mess.
The Lease Terms
Finally, you need to go over the lease terms with a fine-tooth comb. Even though the ownership of the property is changing, the lease won’t be, and you’ll have to honor it until it expires. Most states have laws protecting tenants in situations like this, and the property’s new owner is not allowed to alter the terms of the lease in any way unless there was some type of exception written into the lease. Regardless, it’s your job to examine the lease carefully so that you’re aware of important details like payment amount and due date, when the lease expires, and what your responsibilities are (i.e., utility bills, yard maintenance, etc.).
Of course, as with any potential new investment, you’ll want to run the numbers and make sure that you come out in the black. On a tenanted property, it’s not a bad idea to err on the conservative side of things, as a person selling a tenanted property may very well be selling because of tenant issues.
Before closing any deal, make sure you carefully examine the factors above to ensure that buying a tenanted investment is a good move. If there are any red flags, use these to negotiate more favorable terms for yourself, and be ready to walk away if you need to. With conservative number-crunching and a proactive approach with the renters, your chances of scoring a great deal on a tenanted, cash flowing property are greatly improved.