When you purchase a rental property, it may come with tenants in place, and those tenants will suddenly become YOUR tenants. These tenants are known as “inherited tenants.” Inherited tenants can be beneficial, as you will not need to immediately spend time filling the vacant unit, and you’ll be receiving income from day one. However, inherited tenants can also be risky, as they were not put in place by you, and you don’t have a clear indication of how well they were screened or what type of tenant they are.
Furthermore, they may have been poorly trained by the last owner and will need to be re-trained to follow your rules and way of doing business. Or maybe those tenants will be absolutely perfect, and you’ll be thankful to have them.
The truth is, you won’t really know for sure until you begin dealing with those tenants. However, there are a few things you can do to increase the chance of a successful acquisition of inherited tenants. But before we get to that, understand that legally, the leases go with the property, which means everything about the lease stays the same when you take over. For example, if you purchased a property and the existing tenant was three months into a one-year lease, you would be required to abide by the terms of their lease for the next nine months. Again, the leases go with the property.
Review Existing Leases
Before closing on the property, you will definitely want to review the leases for each existing tenant to verify the income and what expenses are the tenant’s responsibility. Do they match the financials that the seller provided?
For example, let’s say you purchased a triplex and the seller claimed to get $500 per month, per unit. If the lease shows just $400 per unit, you have a problem. This is actually not as rare as you might think, as sellers like to talk about their opinion of “fair market rent” (what they think it COULD rent for) rather than what they are actually receiving. This is known as the “pro forma” rental income. If this is the case, start asking questions and be sure to run your numbers with accurate data, not pro forma numbers.
Related: 7 Types of Tenants That Are Harder to Insure (& What You Can Do About It)
Verification doesn’t end with comparing the leases to the financials. Leases can easily be altered or forged. Imagine purchasing a property, only to find out (after closing) that the lease was changed by a shady landlord. This kind of thing does happen, so you must verify the terms of the lease with each tenant before purchasing the property. This is done through an Estoppel Agreement.
An Estoppel Agreement is a simple, one-page form that the tenant fills out letting you know the terms of their lease to the best of THEIR knowledge. If the…