Purchasing rental property with tenants

[Neil Holtzhausen]

First time buying rental property with tenants. For due diligence, is it appropriate to ask for records showing current tenants are paying their rent? Does the security deposit go to the new owners at closing, and does the tenant need to sign a new lease agreement? Thank you.

[Nathan Gesner]

Quote from @Neil Holtzhausen:

First time buying rental property with tenants. For due diligence, is it appropriate to ask for records showing current tenants are paying their rent? Does the security deposit go to the new owners at closing, and does the tenant need to sign a new lease agreement? Thank you.

It's not only appropriate, it's highly recommended!

Don't take the seller's word for it on anything. 

Your offer to purchase should include a requirement that the Seller provide all documentation and agree to sign an estoppel certificate (also called an estoppel form or agreement). The estoppel is a form filled out by the tenant, then confirmed by the Landlord, and then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was $2,000 because they paid the last month's rent. How will you know? An estoppel certificate fixes this problem.

Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchanging "doc" with "pdf" for more options.

Here is an example and explanation: Sample Estoppel

Some have a lot of legal jargon but this document does not need to be so detailed. This is an essential tool for anyone buying a tenant-occupied property.