Is it better to receive a property empty?

Question

I am buying a 4 unit property. Currently 2 of the 4 units are rented near but slightly below market rate. The owner stated he could deliver the units empty if needed. I do not plan on doing major repairs at the moment, maybe down the road. Should I take them up on their offer and have the property delivered empty so I can place my own tenants? Or should I leave the tenants in place and be happy that they are able to pay rent at the moment? Thank you for any advice.

Keith Kellermeyer · Answer

Hey Michael!

There are pros and cons to inheriting tenants. I would recommend you get a brief history of how the tenants have performed from the current landlord (missed/late payments, how long they have lived in the property, how long their current leases are) and see if these existing tenants meet your requirements.

Pros:

• No money spent on advertising/placing tenants
• You receive rent payments immediately (helps offset your initial costs if the units were vacant)
• You can start to build stockpile of cash for when those units do turnover, rather than having to come up with capital to renovate off the bat.
• Higher cash flow (rent payment income, no vacancy expense, no turnover cost to re-rent the room)

Cons:

• Tenants could be nightmare tenants (damage, no payments, refuse to leave) - but you can get this info from the landlord/neighbors/tenants themselves.
• Don't meet your tenant requirements
• Clash of personalities

Personally, I think inheriting tenants is a good thing, so long as they are paying rent and have a decent track record with the current landlord. By inheriting tenants, you have the opportunity to turn them into life-long tenants of yours, to go in and create a great reputation with them by fixing things that the previous landlord neglected, and building your rapport as a landlord and investor.

Hope this helps :)

Joe Splitrock · Answer

When someone says they prefer a property delivered empty, it assumes two things:

1. The current landlord has done a bad job screening.

2. The new landlord will do a better job screening.

That could be an incorrect assumption, because the current landlord is probably experienced and in many cases the new landlord is inexperienced. I have seen countless stories of new landlords doing a horrible job screening.

Rather than assuming, take the time to do due diligence. Ask the landlord for a copy of the leases, applications and screening paperwork. Assuming they did a good job screening, you would be far better inheriting only two vacant units versus four. Not only does vacancy cost you lost rent, but it also takes time to place tenants. If you hire a company to place tenants, they will generally charge you one months rent.

Jason H. · Answer

If the current tenants have a decent track record with paying and the current rents they’re paying aren’t too off from the max rent you could be charging with a new tenant in your sub-market, then I would keep them in light of the outbreak.  Assuming you are going to use a leasing agent to help you find new tenants, having two existing tenants will save you two leasing fees (assuming they will be charging you one month rent as the leasing fee)

Also see if they are on month-to-month with the previous landlord or if you could legally transfer them to one ...that could also be to your advantage as you are not going to be locked in if they start to become a hassle.

Account Closed · Answer

I agree that if you can afford to take the property without any inherited tenants, that's best.  They tend to be high maintenance and not worth the time or hassle, as the rents paid don't usually offset the hassle.

Brendan F. Nagle · Answer

I have had it go both ways. My first duplex we purchased empty but the former owners put tenants in to get one more  month of rent during closing. We should have kicked them out but didn't and both were terrible tenants.

On a 6 plex I purchased last year, it came occupied and we have 100% occupancy for 8 months. It worked out better than expected. There was a person not on the lease that took months to get rid of but let's leave that alone.

Meet these tenants, interview them, and do a back ground check. You pay for the check, they live there already. If they meet your requirements, keep them. If not, send notice.

Michael Noto · Answer

@Michael Lettieri It is very rare that a seller offers on removing tenants. I would take them up on it unless you are buying a solid class B or A property and the tenants are at that level also.

When dealing with class C properties I have found over time that you want to control your fate and place your own tenants because the criteria people use to place tenants are not uniform and if you end up with a dud tenant the cost of getting them out plus turning the unit turnover will be a lot higher than experiencing a short term vacancy until you get the units filled with your tenants.

Nathan Gesner · Answer

EMPTY!

If the Seller fills it, he will have no motivation to fill it with quality renters. I'm not saying he'll turn it into a crack den but he is likely to be lazy in his screening process.

You also open yourself up to future problems because the Seller may operate differently than you. What if he moves the tenants in and says he's OK with them paying by the 10th of each month, but you want them paying by the 1st? You don't want the seller sticking you with something you normally wouldn't agree to.

Leave them empty. Place your own renters and start fresh.

Michael Lettieri · Answer

Thank you for the help. Very healthy discussion. These tenants have been in place for a while so I’m leaning towards keeping them there. I will do my due diligence and vet them though.

Ujwal Velagapudi · Answer

I've purchased from long time owners who personally oversaw their properties. The inherited tenants have been a mixed bag, but most have been decent. I bought for the cash flow, so I expected it right out of the gate. Inherited tenants have slowly weeded themselves out, and others have stayed with me for years. Also, if they are a long time tenant (like 33 years), I would love to keep them in for the stability. I agree as some have posted that you will have to adjust some terms on your lease as they have been treated in a particular way in the lease and by the former owner/PM, so your style may vary.

On the flip side, another property owner had gotten his apartment building fully occupied with poorly vetted tenants just for the sake of occupancy, which we had to suffer with through non-paying tenants, evictions, damages, etc. I would make sure to get payment history from each, and also discount, or even in some cases disregard newly occupied units, especially if they have poor payment history. I would also ask for their screening process and see if they had truly passed your own criteria.

One of the biggest selling points for me when I sold my buildings last year was that they were fully occupied, cash flowing, had great payment history, and long time tenants. I made sure to also pass on my management style to the new owners so they can try to replicate as best they can, along with some tips for each tenant on their likes/dislikes and tendencies.

Jim Cummings · Answer

@Michael Lettieri. Good advice from all. Do your Due Diligence and keep tenants if everything looks reasonable. Raising the rent $100 takes over a year to make up the difference from one month's Vacancy. PLUS cost of turning the unit.

Is it better to receive a property empty?

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