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Buying a home with a tenant in place

By Shannon Callanan

Usually, when you buy a property it will come with ‘vacant possession’, which means the home is empty and ready for you to move in. However, some investment properties are sold with a tenant still in the home. This presents some challenges and opportunities for buyers depending on the circumstances.

Here are some pros and cons of buying a property with a tenant already in place.

PROS

1/  It could save you costs upfront

If you’re looking to buy an investment property, finding a tenant and renting the property out after purchasing can be a costly exercise. There is usually always a period of one – two week’s vacancy as you advertise and organise the home to be rented, as well as leasing costs.
This will save you time choosing a tenant and it will save you money in undertaking the marketing process. When you purchase a home that has a tenant already in place, you avoid all these costs. The lease is automatically transferred into your name when the property is sold and the rent into your nominated account instead.

2/  Provides a degree of certainty

When a tenant is already in the home, you know exactly how much rent you will be getting from day one. In areas that are going through slower periods in the rental market, or where there has been a significant amount of supply, the additional certainty of a long-term tenant can be beneficial. Ensure to check how long is left on their lease agreement so you know how long they are expected to stay – some tenants may be on a periodic (month to month) lease as well. The fact a tenant is in the home also means the property comes with a built-in rental history, which allows you to speak to the property manager about the demand for this type of home and the costs involved. For homes that haven’t been rented before, this can be harder to determine. Best word of advise here is to speak to an experience property manager who is well equipped with the knowledge of the local market place including pricing, time of year, supply and demand.

3/  You can choose your property manager

While the lease is in place already, the property manager is not a ‘must-keep’ feature. There is nothing stopping you from switching to a property manager you prefer if you find they are not quite what you had in mind and not assisting with the goals you are wanting to achieve with your new investment property.
Similarly, if you do keep the property manager, they may have already built a good relationship with the tenant and have a thorough knowledge of the property. This pre-exisiting knowledge can be worthwhile exploring.

CONS

1/  You cannot choose the tenant yourself

In a situation where you take over the lease after a sale, you are required to honour the rental agreement with the renter involved in the property. If you get a fantastic tenant who keeps the home in a beautiful condition, then you have come out on top – but there’s a chance that you won’t be so lucky. In these circumstances, you’ve inherited another landlord’s problem tenant and you will have to deal with it through the formal channels with your property manager.

2/  Home buyers will have to wait

For home buyers intending to move into the home they have purchased, you will have to wait until the lease has finished and the proper notice periods have been served on the tenant to vacate. If the purchaser is paying rent or other accommodation costs in the meantime, this can make the experience costly. Any renovations and improvements would also have to wait until the end of the lease. This could be a significant turn off for those ready to move into their new home straight away. However, if you’re not a home buyer, this point could be a positive.

3/  You can’t ‘set the rent’

As you will be stuck with the lease terms provided by the former landlord, this will include the rent being charged and any additional terms and conditions. If the rental market has skyrocketed since the tenant moved in, you won’t be able to increase the rent until the end of their lease. This can be frustrating for investors who are familiar with the local market and have undertaken calculations based on today’s rent. If the previous landlord or property manager made a mistake or undervalued the rent to get a tenant into the property, this could be costing you money.

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