Looking for advice re: inheriting an odd tenant lease agreement

Member since 2018 · 15 posts · 7 votes

I am considering to purchase an investment property that is tenant occupied. One of the tenants has an unusual lease agreement that is a 10-year rental lease with the rent locked in for 10 years and 6 months free rent upfront. The idea is that the seller wants to bring the rent up to market in a rent control area. Is this legal if the tenant signed the lease for a rent increase above the rent cap for the same unit? What are my options? Can I create a new lease agreement before COE? Can I talk to the tenant? Or is this a red flag and should I not consider this deal? Thank you for your help!

0 Reply

27 views

6 Replies

Jump to latestLatest

Sort by

Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
@Angeline Kung. You have to follow the lease so if it’s not in the lease, you can’t do it
0 Reply
Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
Even if you sell the property the buyer has to honor the lease.

0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
7y
You can't change the lease. Your option is to either accept it or ask the seller to try and negotiate a new lease with the tenant before you buy it.
Sounds like a mess and I would stay away from it. Even if the rent is a decent amount, there's a high likelihood the tenant will break that lease during the 10-year period. Most tenants break two-year leases! It's a big risk that you will lose thousands, maybe tens of thousands, in rent income and still end up with trouble.
The DIY Landlord Book4.7248 Reviews
Website View Page
0 Reply
Angeline Kung
OP
Member since 2018 · 15 posts · 7 votes
7y
@Caleb Heimsoth @Sam Shueh @Nathan Gesner thanks so much for your replies. sounds like what the seller is doing is not legal and i would inherit this lease and rent increase as the buyer. i’m wondering what is the worst case scenario? the tenant goes to rent board, seller and buyer would have to refund rent back, and tenant gets restored at prior rent amount? or tenant is locked in for 10 years at the rent stated on the lease? if the tenant breaks the lease and moves out sooner, isnt that a good thing so i can rent at market value?
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
7y
@Angeline Kung if you accept the property with the existing lease, you are essentially paying the owner full price for something that is renting at a discounted price. If the tenant is $100 below market rate and stays for the full 10 years, the lost to you will be $12,000. If the market rate increases over the next 10 years, which it is all but guaranteed to do, then your losses will be significantly more. Are you willing to take on an existing tenant with a projected loss of tens of thousands of dollars? if they break their lease, that would enable you to find a new tenant that meets your criteria and rents at market rate. However, you would be losing money between now and then and there's a good chance you would lose additional money me with a vacancy or if the current tenant turns bad and leaves you high and dry on rent, damages the unit, Etc. I wouldn't take the existing deal. I would require the seller to take a reduced purchase price based on the projected losses of 10 years at a reduced rental rate, or I would require them to renegotiate the contract with the tenant before closing.
The DIY Landlord Book4.7248 Reviews
Website View Page
0 Reply
Angeline Kung
OP
Member since 2018 · 15 posts · 7 votes
7y
@Nathan Gesner makes total sense. thank you so much for your guidance!
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.