Taking Over Tenant Lease With Current Rent Below Market Value

[Travis Zappia]

I am in need of some advice. I recently came across a deal the below deal and want to get some advice from members of BP to find out if you would do the deal or not:

• Home is already occupied and has a dream family in the home. They have been there for 4 years and the home is in amazing condition. When viewing the home tonight the family was there and when asked if they planned to stay they said they would love to stay in the home
• Asking Price For Home: $144k
• Home is listed as a 2/2 but I found that it is actually a 3/2 with two master bedrooms
• All appliances and rooms were in great shape with hard surfaces throughout home
• Current tenant is renting at $1k/month and has a lease that ends 4/30
• Comps for rental homes in the neighborhood are $1200, so the tenant is currently paying well below market rents
• Home currently has a Property Manager managing it as the homeowner lives in Spain and is trying to get rid of the property

Questions I have (and I know you will have to put a disclaimer because these are some legal questions but would appreciate feedback)

1. Would you do this deal?
2. Can I terminate the Property Manager immediately if I purchase the home?
3. Can I get the tenants to immediately sign a new lease if I were to purchase the home? If so, what would you recommend the updated lease say? What should I increase the rent to as I wouldn't want to raise it too much and lose a dream tenant?

Any and all help would be much appreciated!

[Mindy Jensen]

@Travis Zappia , I'm in a different market than the other two commenters, and your rent/purchase price is far closer to the 1% rule than I am ever going to get in my area. I'm not immediately turned off by the price of the property, but I also know absolutely nothing about your market, property prices or rents.

I would need more information about the property before I said yes or no. What is your monthly cost - including CapEx and vacancy? If you're only making $100 after all is accounted for, that isn't very much.

What is the condition of the property? You say amazing condition, but how old is the roof, furnace, water heater, ac, etc? 

I would assume you can terminate the PM contract - that should be with the current owner, not run with the house, but make sure if that's a deal breaker.

The new tenants would have to willingly sign a new lease, very little likelihood they'll do that. But it's already March. You won't close much before May anyway - give notice according to your state's landlord tenand laws that you intend to raise the rent to $1200 effective June 1. It might even be July 1, depending on your laws regarding notice and the time you take possession of the property. 

Make it a clause in the contract that the current owner does NOT sign them up for another annual lease unless he raises the rent to $1200. It would sure stink to have them locked into the property at $1000 for another year if your intent was to raise the rent.

Please note that you must give at least one month's rental period notice - so if your state requires a 30 day notice, that doesn't mean 30 calendar days, that means at least 30 days and including one rental period - typically one month.