Becoming a real estate investor is simultaneously exciting and a learning curve, especially as a first-time investor. There's plenty to know about buying an investment property or a MULTIfamily home. However, things can get a little complicated when you're trying to buy a duplex that has tenants still living there. Depending on your circumstances and your plans for the investment property, this can be a great thing or a hindrance. When purchasing a tenanted duplex, there are some potential challenges, so here are six important things to know when purchasing a tenanted MULTIfamily home.
1. Determine your living situation.
If you were planning on renting out the MULTIfamily property anyways, this situation might be the best for you. It takes all the hard work out of finding renters and advertising and minimizes the potential for months where no rental income is coming in. In some situations, purchasing a tenanted MULTIfamily home can be the best situation for the investor.
Suppose you were looking for a MULTIfamily property for a distinct purpose. For instance, if you needed a place to live and needed a place for your family but required separate suites. In that case, there are a few options for you as the buyer.
When submitting the offer on the property, you can put the onus on the seller to ensure that the tenants are aware that they need to move out. Placing a contingency on the sale of the home means that when the home closes, the property needs to be vacant. The burden is then on the seller to ensure the tenants' lease is broken, or the tenants have been given some incentive to leave early, and they are all in agreement.
Suppose the seller cannot agree with the tenants, or they're not willing to do so, then you should go back to house hunting. You could also take it into your own hands and negotiate the lease or buy out the tenants after the sale is final. Your new tenants are not obligated to accept a new lease or break their current lease if they don't want to. Be careful to ensure you're doing everything in a legal matter. Otherwise, you may end up with a lawsuit on your hands if you attempt to force an eviction.
If you're opting to purchase the house with tenants in either scenario, ask for a copy of the current lease so you know what you're working with. As long as the lease is standard, well-written, and in accordance with current rental laws, you can prepare yourself for the next steps, if any. If anything seems wrong or off, you can ask the seller to provide you with a proper and valid lease as a closing condition. If you plan to keep the tenants, asking for a history of their rent payments, security deposits, and all other documents will help you determine what kinds of tenants you're inheriting. You will be their new landlord, after all. Depending on which state you're in, you might be required to keep the security deposit in a separate trust account. Your realtor will be able to determine any pro-rated rent payments depending on the date you are closing.
Determining your goals with your new rental property is the first step to becoming a real estate investor. If you know exactly what you're looking for, considering a tenanted duplex will be much easier and reduce your stress levels.
2. Leases are still upheld.
When a lease is signed between a tenant and a landlord, it is a legally binding document, and it doesn't just become null and void if the house sells. Suppose you don't want to deal with tenants and leases. In that case, it's best to find a MULTIfamily property that isn't occupied if you're looking for an easy transition. Leases are tied to the property, not the landlord. Legally speaking, you can't raise the rent, evict the tenants or modify the lease because you feel like it - unless, of course, the tenant agrees and a new lease is signed.
Depending on your state, the only exceptions to this rule are:
- if you're purchasing the duplex in foreclosure or
- it's stated in the lease that it can be terminated if the property is transferred to a new owner
Suppose you're set on not being a landlord or having tenants because you want to live there. In that case, you can ask for the seller to deal with the lease and ensure it's broken before you take possession. Tenants can legally stay in the property until the lease ends, regardless of who owns it, so you might be looking at buying them out if they don't want to leave.
3. If there is no lease, make a new agreement.
Suppose there is no formal or legal lease agreement on the property, or it's a month-to-month situation between the tenants and the seller. In that case, you have many more options if you'd like to take over the property. If you'd like to raise the rental prices to ensure you're covering your investment and getting some passive income, this would be the time to do it. Ensuring you and your new tenants are on the same page is vital.
If you'd like to keep them as your tenants, then you can draw up a new lease agreement with them that meets both of your needs.
4. Screen the tenants.
Suppose you're in a situation where you'd like to keep the tenants because your new duplex is a rental property anyways. In that case, you will want to screen the existing tenants that are there.
In this situation, it's likely a win-win. You're getting a property that's already full, with access to immediate cash flow, little downtime, and a lot less work searching for the best tenants. If the tenants have lived in the property for a long time, you've hit the gold mine. If you ask the previous owner for a history of their rental payments, you've reduced your risk tenfold.
Whether you're searching for brand new tenants or getting to know new-to-you tenants, the same rules apply. Bad tenants can be a nightmare for landlords. From late rent payments, damage to your home, costly repairs, and eviction processes that take months. If you're inheriting tenants, you will likely have a different screening process than the current owner. If they have a history of being great tenants, then you are in great shape. If they don't, you have to do your due diligence. There have been instances where landlords try to get rid of bad tenants simply by selling the property and not telling the truth about them to the new owner.
5. Foster a good tenant and landlord relationship.
As a renter, no one likes a bad landlord, either. Introducing yourself through a landlord introduction letter is the first step to building that relationship before the house has sold. Setting up a time to meet with them to explain your expectations, get the details out of the way, and find out what they expect from you as a landlord will benefit you greatly. You will want to ensure they know when and how to pay their rent to you, how to contact you for maintenance requests, and when they can reach you if they need anything.
Building a solid relationship with your tenants is ideal for both of you. It can make your job as a landlord much easier.
6. Reduce your risk
Suppose you have decided to go ahead and purchase a tenanted duplex or MULTIfamily home. In that case, you will want to do everything you can to mitigate the risk associated with it. Of course, you can't be absolved of all risk in any real estate investment situation, but you will want to protect yourself in this case.
By having your new tenants and the current landlord fill out and sign an estoppel agreement, you can reduce your risk. You will want to have the landlord sign and transfer their security deposit to you, which you will deposit into a trust account.
An estoppel agreement is a clear and detailed outline of any current lease terms and property conditions. For example, suppose your tenants decide to leave at the end of the lease. In that case, they can't claim that their deposit was significantly higher than what you have on record or that the appliances in the property are theirs. The agreement allows everyone to be on the same page before the sale takes place, and you won't be taken advantage of.
Becoming a real estate investor is an exciting endeavor, but there can be challenges along the way. Suppose you're looking to purchase a duplex to rent out and create some passive income. In that case, a tenanted property can be your best option, as long as you're inheriting great tenants. Ensure that you know all the details of the lease that is currently in place. Have the seller and the tenants fill out an estoppel agreement to protect yourself. Happy real estate investing!
Looking for the ultimate guide in buying a fourplex? Check out our blog post here.
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