Purchasing with no tenants or inherit tenants

[John S.]

When I first got started investing in 1-4 units, I always thought having tenants when you purchase a 1-4 unit is a better deal than it being vacant:

1) It could mean that something could be wrong with the property preventing it from being rented.
2) There is a security with a tenant in place that even an inspection won't fix.  For example, people don't want to steal an AC unit when they know someone is living there.
3) You know you will have income coming in from the beginning.  I have heard this is good from getting a mortgage and it most likely is the reason I have been able to get mortgages easily on a couple of mine.

In an opposite view, my property manager really doesn't like inheriting tenants.  He knows he has to follow the contract that is already in place and he has to build trust with a tenant that he might not have chosen if he had the choice during a tenant screening.  Nevertheless, he is incentivized to take this tenant and turn him over since he can make a bigger profit from the management and tenant placement fees involved.

I wanted to see what other peoples' opinion are in this subject.  If you inherit a tenant and they don't work out, that means you will have to pay for turnover cost and most likely you will have to look at eviction when you take over the unit.  I think we a trustworthy PM than it might be better to have a vacant unit.

[Jeff Copeland]

As a property manager, I much prefer screening and placing tenants to inheriting tenants. 

Inheriting tenants is like a box of chocolates; You just never know what you're going to get!

In my experience (and this is admittedly probably more of a concern for multi-family properties), sellers have an incentive to relax their tenant screening requirements in order to get the property to "full occupancy" so they can advertise a higher cap rate. But these lower-quality tenants don't tend to pay on time (or at all) or stay long...so as a buyer, you run the risk of paying for an eviction, plus a month or two of no rent + vacancy. 

This is not all tenants of course - in my experience, about 50% my inherited tenants didn't work out. 

But if half of the tenants I screened and placed as a property manager washed out, I wouldn't be a property manager for very long!