Purchasing a property with existing tenants: what you need to know

There are a lot of benefits to buying an investment property with existing tenants. You’ll start earning rental income from the property’s settlement date, and won’t have to shoulder the costs of advertising the property to renters – not to mention you can dodge the hassle of finding a new property manager.

But purchasing a property that comes with its own occupants can also have its downsides.

Your obligations to tenants

If the tenants have been there for a long time and the property’s in good nick, you can be relatively sure that the tenants have had a good relationship with their property manager or landlord. But what if you’re not happy with the tenants of the property you’ve purchased?

The first and most important thing to remember is that most leases are not voided once a property changes hands. Unless there is a special clause in a lease that attaches it to a mortgage (which is rare), in all states and territories you are required to honour an existing lease when you purchase a property.

So if the existing tenant is on a lease you must honour its terms. That means not breaking the lease, or giving fair notice or reason if you do terminate the tenancy. “Fair notice or reason” can change from state to state, but the rules are relatively consistent. If you’re unhappy with your tenants because they’re behind on rent or have violated the terms of their lease, for example, you only have to give them 14 days written notice to vacate in most states.

You are also able, in most states, to end a fixed term lease early if you have written agreement from the tenants.

But what if the tenants haven’t violated the terms of their lease? Perhaps you intend to occupy the home. In that case, make sure that can time your move in date for shortly after the lease term is over.

But remember, even when a lease is ending, you must give the tenants proper notice that you do not intend to renew their lease. This could be up to 90 days notice for Victorian tenancies. And in some states, you automatically switch over from a full term lease to a periodic lease, so you’ll still have to give up to 60 days notice if you require the tenants to vacate.

Another thing to keep in mind is the income you’re receiving from tenants. Be aware that some vendors have been known to sign up tenants shortly before selling and at sub-market rents. If the sellers manage to pull it off, the practice can give uninformed buyers the impression that the home is highly rentable and therefore a good investment.

So before you purchase a home with tenants, make sure you inquire about the current rent being charged. In most states owners cannot raise the rent during a fixed term lease, unless a rental increase is flagged in the tenancy agreement. So if you, as the new landlord, do want to raise the rent, you’ll have to wait til the end of the fixed lease period.

The property manager

You’re happy to keep your tenants in your new home and thrilled with the automatic rental income. So far, the transition has gone smoothly. But there is one more ingredient in the mix, one that can make or break your relationship with your tenants. The property manager.

When purchasing a house with an existing lease, chances are, you are inheriting the home’s property manager as well. This could be a great thing. The right property manager will have good market knowledge, be familiar with the property and its tenants and be able to spot any problems before they occur. But a bad property manager can neglect your property and your tenants.

Chances are, the property manager will be from the same agency as those marketing the home. So if you’re interested in purchasing a property with existing tenants, see if you can get a chance to speak to the property manager. Though a five minute chat on the phone won’t tell you everything you need to know, first impressions can be valuable.

Remember that even if you do inherit a bad property manager, you always have the option of changing to a better one. If you ditch the property manager, you are always able to retain your tenants and their lease. It may be a hassle – most experts recommend giving your property manager at least 28 days notice – but it’s worth it for the safety of your tenants, and your investment. And when you do go about choosing a better property manager, make sure you do it right.

Neither bad tenants or a dodgy property manager should be enough to put you off making a sound investment with good capital growth potential. But if you go into your purchase with your eyes open, you can save yourself a lot of time and money.

Source: Property Observer
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