When a rental property is purchased, it typically comes with tenants already in place. Their problems will suddenly become YOUR problems. They are referred to as “inherited tenants.”
These tenants can be beneficial, as the landlord is able to avoid spending time filling vacant units, and receives income from day one. These tenants also come with certain risk factors. The owner will have no idea if they are a quality tenant or if they were well screened.
Re-training may be necessary so that clients learn more about your rules and ways of doing business. Or those tenants could be totally perfect, and you’ll have zero issues with them.
Related: Debunking The Sweat Equity Myth
Until you start to deal with these tenants, you won’t know for sure. There are a few tips you can follow to increase the chances of successfully acquiring inherited tenants. Before we get to this, understand that everything about the lease remains the same during the takeover.
For example, if a property is purchased and existing tenants are just four months into their one-year lease, you’re required to abide by the lease for the next eight months. Each lease aligns with the property.
Review Existing Leases
Before closing, you’ll certainly want to review each lease. This lets you know if the existing tenant’s financials match the ones that the seller provided. For example, let’s say a triplex was purchased and the seller claimed to get $600 per month, per unit. If the lease shows just $500 per unit, that’s an issue.
These instances are not rare. Sellers enjoy discussing their “fair market rent” opinions. This is when they talk about what they COULD rent the place for, as opposed to what they actually receive. These are known as “pro forma” rental income numbers. Be sure to run the numbers accurately, do not rely strictly on pro forma numbers.
Leases must be compared to financials but they can be forged or altered. Leases are changed by shady landlords prior to purchase on a regular basis. Verifying the terms of the lease with every tenant before purchasing a property is a crucial step. An Estoppel Agreement is used.
The one page form is simple. The form gives the tenant the chance to let you know their lease terms to the best of their current knowledge. If the seller of the property does not allow this step take place, they may be trying to hide something. Estoppel Agreements must be signed signed, so that discrepancies are cleared up before closing.
Honest mistakes do occur. A tenant may also lie to try to get lower rent. Do not buy a property until you have a full understanding of what you are getting.
An Estoppel Agreement should contain:
- Names of tenants residing in the unit
- Terms of the lease (including start date)
- Amount of rent due each month (and date it is due)
- Security deposit amount
- Utilities payment information
- Appliance ownership information
- Pet ownership information
- Information regarding necessary problems or repairs
- Additional agreements with previous landlord
All parties must sign this agreement so that it is kept in the “tenant file.” This way, if a tenant tries to make a falsified claim later on, their signature is already on the Estoppel Agreement and their argument is nullified.
Place Yourself in Their Shoes
When purchasing properties with inherited tenants, bear in mind that they are already concerned about the unknown. Questions must be asked, such as “Who is this new owner,” or “Will I be kicked out,” or “Is the rent going to rise?” These uncertainties can cause a rocky start to the relationship. Place yourself in their shoes and try to make the process as easy as possible.
Sending letters to tenants when a property is taken over is best. Introducing yourself and your company is a good first step. This lets tenants know where they can direct all phone calls, maintenance requests, questions about leasing, and anything else regarding their tenancy. The letters are used to let tenants know about potential improvements that are going to take place at the property in the months to come. This reassures the tenant and lets them know you have their best interests at heart.
Inherited Tenant Rent Hikes
What happens when you know that rents are not high enough? This is a common concern. Many landlords remain reluctant to raise the rent, even when market rates climb. Many tenants are going to be on month-to-month agreements, so rent can legally be raised with merely a 30-day notice.
But is that wise? Should rent be raised right away or do we raise the rent over time? If rent is suddenly raised on all tenants, many would move, and we are left with units in need of rehab and less income to assist with such expenses. On the other hand, tenants who stay at the lower rent price cost their landlords thousands of dollars in potential rent every year.
There’s no clear cut answer to provide. If you do not have a lot of capital to handle the storm, keep the rent the same for the initial year, only raising the rent as units are fixed and more new tenants arrive. Other investors may have more capital and decide to accept an immediate loss. It is a tough balancing act and something only you can decide on.