How can buyers better navigate the process of purchasing properties with existing tenants?
Tenant occupied rental properties can be very attractive. As a real estate investor it can take some of the risk and guess work out compared to acquiring a property, then looking for a renter. The same goes for ‘house hackers’ looking for small multifamily properties in which they would like to live in one of the units. It can also be great for those looking to seize on current market opportunities and low interest rates, but who may not plan to live in the property for several years or more. However, there can be some extra challenges and steps in acquiring these properties.
The Challenges of Buying Properties with Tenants
These extra steps and considerations can include:
- Additional paperwork for lenders
- Navigating tenants while viewing and inspecting properties
- Ensuring appropriate transfer of tenant monies
- Minimizing risk during the transaction
- Walk-throughs
Records and Finances
It is absolutely critical to know and request the additional documents and paperwork you may need to finance a rental property. Talk to your lender in advance. What will you need? Will you need tax returns, rent rolls, and copies of leases? It is also crucial to determine what finances may need to be transferred or credited to you. Are there tenant deposits and prorated rents? As a buyer you just can’t take the seller or real estate agent’s word for these amounts. You need to have them verified with tenants. This happens via an estoppel letter. And you need to see the leases and confirm the details with tenants so that they don’t come up with wildly different stories after the closing.
Access to Units
Access to rental properties can be tricky. Yet this is where you really start to get what you’ve got, and not. It is important to be respectful of tenants and not to go poking around the property early or you may mess things up. However, it is important that you do get into all the units, and your inspectors get into all the units before your inspection period is up. If not you must price in the absolute worst case scenario in terms of both the tenant, and the property.
This will also come around again when it is time for the walk-through before closing. Do not, never, pass up on the walk-through. If the seller wants to sell, they need to facilitate that. Again; if they don’t then the contract should be negotiated for the very worst case scenario. In fact, the walk-through is more important than upfront because many things can change, not only with the property, but the tenants, during the transaction process.
Talking to Tenants
In addition to getting the paperwork, it is smart to talk to the tenants. This may not be appropriate during initial viewings. However, speaking to tenants directly can help get a true understanding of the situation, give you better insight into whether you want this tenant around for a long time, or not, and provides an opportunity to instill confidence in good tenants that you want them to stay, and will be a good landlord so that they don’t panic, stop paying rent, and run for the hills with all of the fixtures in the unit.
Do note that it may pay to complete a little due diligence on tenants yourself. Things are not always what they seem, and nothing should be taken on hearsay alone. A 5 minute Google search might reveal a lot more about tenants than anything else.
Reducing Risk and Improving the Upside
There are also a number of ways that real estate buyers can minimize risk during the transaction, and elevate the upside for after the closing and acquisition. Perhaps most importantly is choosing a reputable seller. Is this seller experienced in this area, do they have a good track record for selling rentals and even turnkey properties? What do those reviews look like two or five years down the road.
Obtaining insurances and warranties on major appliances and even rental income can also be incredibly powerful. That can help eliminate unexpected losses and cash demands. Often these tools are available for just a few hundred dollars. Often the seller or one of the real estate agents will be willing to pitch in and cover these items to make the deal work. Remember that when it comes time to sell too, and how they may be a great marketing tool.
Summary
Occupied and performing (or not) rental properties can be a great buy. They have many advantages. But it is important to accurately assess performance, property condition, and preserve that through closing. With a couple tweaks and a few hundred dollars some of those key factors can be insured or guaranteed for a portion of time too.
