To an investor, buying a property that’s already tenanted can seem like the perfect plan: you’ll save time on placement and be able to generate cash flow right away. Plus, if you were planning on using a management company that charges a month’s rent as a tenant placement fee, you’ll save some cash.
But having a tenant already in the property is very different from having a good tenant already in the property. And if you buy a property and get stuck with a bad tenant, you’re actually worse off than you would have been if the property had been vacant.
If you’re already working with a management company you trust—or you’re going to be managing the property yourself—our recommendation is to avoid tenanted properties altogether. Sure, you’ll have to wait an extra month or so to place a tenant, but it’s worth it to avoid the risk of inheriting a problem tenant.
Ultimately, it’s an issue of misaligned incentives: sellers know that tenanted properties often sell for more, so they’re highly incentivized to get someone in the property quickly—even if they haven’t been thoroughly screened. Once the property is sold, that person is your problem. (We’ve also seen more than one situation where someone sold a property precisely because the tenants were so difficult, then lied about it out of fear that the truth would hold up the sale.)
If, though, you are going to purchase a tenanted property, there are a few simple precautions you can take to greatly reduce the chance that the purchase goes wrong.
Ask for proof of past payments
This one is so straightforward that it’s amazing more people don’t do it: ask for a rental history to demonstrate that the tenant has paid rent reliably in the past. Of course, a rent roll can always be faked, but some evidence is better than none.
Meet the tenant
If possible, meet with the tenant before the sale. Not only will you get a sense of what they’re like, you can smooth nerves on both sides and reassure the tenant that you’ll be attentive to their needs and a good steward of the property. Don’t forget that as a tenant, having your home change hands can be very stressful.
Meeting the tenant is also a chance to learn more about the seller. Sometimes, tenants will have stories about being badly mistreated by the owner of the property. Don’t do business with a landlord who treats their tenants poorly, even if they seem like they’re treating you well. The real test of character is how a person treats someone they don’t want anything from. It’s just like how you shouldn’t date someone who’s rude to the waiter, even if they’re nice to you.
Build move-out protections into the contract
Sometimes, a tenant moves out after a sale no matter what you do. That’s why, if you can, it’s to your advantage to push for a provision in the sale contract that gives you a small refund if the tenant moves out within a month or two of purchase. Getting such a provision won’t always be possible, but in the best case scenario it can protect you from an immediate move-out.
As an investor, it can be tempting to view “tenanted” as a binary state: either a property is tenanted, or it’s not. But this view fails to take into account the fact that tenants are people, and that they’re not all the same. You don’t just want any tenant in your property; you want a good tenant. So be careful not to let the short-term appeal of buying a tenanted property harm you in the long run.