Property With Existing 3 Year Lease Long Term Tenants

[Sandra McKeever]

New member here and I have a very interesting situation with a house we are looking at - 

We haven't seen the leases yet (but requested them) for a 2 family house we looked at last night.  The current tenants have been living there 30+ years and 20 years respectively (it shows) and apparently have leases ending in December 2024 and May 2025.  Their rent won't cover the mortgage payments and maintenance if we buy it and there are some obvious problems with the roof and who knows what else.  We can get a concession for all that based on the inspection at closing but the reality is that we will likely have to put our own money above and beyond that into making it livable for them until their leases run out.  

The upside of this property is the location which is in a historically significant area with an established downtown area, private college, summer horse racing and a hospital a few blocks away so there are always people from all sorts of professions looking to live there making it a very stable rental market.  There is a comparable size 2 family home within sight of the one we are looking at for sale that is listed at over $500k, so that gives you an idea of the overall neighborhood comps.  The long term value is there for sure.  

We know that we can non-renew the leases and use the equity we have built by paying the mortgage for 2-3 years while sitting on the house waiting for the tenants to leave in order to do a gut renovation, then rent each unit out at whatever market value is at that point and we have the option of doing 8 week track rentals, Air BNB, or regular tenant rentals in this particular area.

The idea of getting into the real estate business with rentals was to find a turnkey property and start making money right off the bat.  This one requires a hefty investment up front which means we buy it and then wait.  For YEARS.  And then send these long-time tenants packing at the end of their leases which makes us feel bad but if they have 24-36 months warning they will just have to figure it out.

My mortgage guy says it's a unicorn and we need to absolutely pursue the property.  My instinct says even though it's delayed gratification and losing money up front that the turnaround on it and being able to use the home's own equity to do the renovations is a good thing.  Not to mention the comps on rentals in the area once renovated put us at a big profit on that side which would make up for all "lost" in the beginning while waiting for the tenants to finish out their leases.

Any insights into this particular situation?  Thanks!

[Steve Vaughan]

A couple thoughts.  Do you guys have the w2 income, career, or job to weather feeding this for 2-3 years (keeping in mind new owners will bring out the repair requests from the tenants)?   If so, I'm comfortable with a long term play. 

Not that you want to hurt these tenants, but the leases may not be valid.  In my state any agreement longer than 12 months needs to be notarized.  

There may be a cash for keys arrangement you could work out to accelerate a win-win with the tenants.  Good luck either way!