Real estate is one of the safest investments you can make. Homes and property will always be worth something, and the market is generally steady.
For investors looking for a property with immediate cash flow, owning a rental could be your best option. But, purchasing a turnkey rental property often means purchasing a tenant-occupied home.
We’ve compiled an in-depth guide to navigating this process. Prospective investors can ensure the stability and success of their investment by adhering to the following rules.
1. Read the Lease
When you buy a tenant-occupied property, any existing leases — and their terms — are part of that purchase.
This means that you are now one of the parties to the lease agreement. The bottom line is that you can’t raise the rent, modify the lease, or kick out a tenant just because you are the new landlord.
If you decide that you definitely want the tenants out, you have a few different options at your disposal. You can include a clause in the offer that makes the sale contingent on the home is vacant. This will leave it up to the seller to terminate or renegotiate the lease before the sale is closed.
You can also renegotiate the lease upon closing. Month-to-month leases are fairly straightforward, but long-term agreements may require buying out the remainder of the lease.
2. Screen Your Tenants
There is no guarantee that the landlord you are purchasing from conducted a good tenant screening process. The appeal of buying a property that offers immediate cash flow matters little if you get saddled with tenants who damage your property or suck up all of your time.
Send your prospective tenants a landlord introduction letter before closing. Try to meet with them. Establishing a rapport before you own the home can give you unique insights into the property you are acquiring and it gives you sense of how the previous owner managed the property.
Successful landlord-tenant communication is all about managing tenant expectations. If the old landlord did not conduct regular inspections or raise rental rates annually, you will need to invest time into clearly communicating expectations to your new tenants.
Know Your Rights and Responsibilities
When you purchase a tenant occupied home you inherit the landlord responsibilities attached to that building. It’s important to understand what you owe your tenants, and what the seller owes you as the new landlord.
Landlord responsibilities include keeping common areas clean, maintaining the safety of the property, ensuring utilities are maintained, and taking care of any pest problems.
Most lease agreements include an initial security deposit. Make sure you arrange to have that deposit transferred to you at closing, this money follows the home just like the lease.
Know the Law
For prospective investors, this industry can seem confusing. There is a web of regulations and bureaucratic oversight that governs the sale and management of real estate. This web varies in size and complexity depending on which state or city you are looking to buy in.
It is important to do your homework when purchasing any type of home, but especially where tenants are involved. Check your local and state level regulations and be sure you have a real estate agent that knows the law concerning tenant occupied properties.
Find the Right Agent
If you’re thinking about investing in a rental property but unsure of when or how to get started, consider partnering with an experienced, local real estate agent as a first step.
A good agent will not only help you find the right investment — they’ll guide you through the entire process, from navigating local regulations to negotiations and closing, ensuring a great outcome while minimizing stress along the way.
Clever Partner Agents provide the same services and support as traditional buyer’s agents and all buyer’s agents in the Clever Partner Agent Network have been identified as top performers in their local markets.
Partnering with an Agent in Clever's Partner Agent Network will help ensure that you make a smart, informed decision without running afoul of regulatory oversight or unusually complicated lease agreements.
Partner with an Agent
Purchasing a tenant-occupied home can seem like a confusing process, but a little research and a great Clever Partner agent can help ensure you have a good experience.
This type of investment, when done right, delivers reliable cash flow and the reward of owning something tangible and essential for your community.
As with any investment, you need to have a plan and a clear strategy. Make sure you check all the boxes by reading further in Clever’s Guide to Real Estate Investing.