Tenant occupied good or bad??

Question

I’m trying to find out whether it’s beneficial to purchase a rental that is already occupied by a tenant. I have a few points to ponder. Why is the owner selling? What does the rent roll look like. Has the owner caused an issue that has a high turn over rate for tenants. Are the figures correct; southeast Texas, list price $150k current rent $1350.00 tenant lease expires next September. With 20% down that property could have a lot of cash flow.

Nathan Gesner · Answer

Keep in mind cash flow is what you have left after paying the mortgage, taxes, insurance, and then setting aside/spending about 50% on maintenance, vacancies, capital expenditures, etc. A home that rents for 1% of the purchase price is usually a good investment ($1,500 rent on a $150,000 purchase) and anything below that needs to be evaluated more closely.

Is tenant occupied a good thing? Maybe. Was the tenant screened? Do they pay on time? Is the property well maintained? How long have they rented there? Are they paying current market rates?

Having a good tenant in place simplifies things for you, but having a mediocre or bad tenant can make things difficult. Investigate closely before deciding.

Jonathan Styer · Answer

@Danial Cousino It is really property/tenant specific. You are free to ask all of those questions and see what kind of answer you get. I would write into your contract that you would like to see a rent roll within x days of contract acceptance. If the tenant pays and keeps the property nice, buying with a tenant in place can be good. Good luck!

Reece Iovine · Answer

Depends if I am rehabbing a property I would love it vacant so I don't need to end leases or wait for leases to end. However that also only works for small deals. You can't/shouldn't buy a 100 unit property not tenant occupied.

Pat L. · Answer

@Danial Cousino absolutely. A difficult tenant WILL be a significant drain on your finances, resources & worse, your peace of mind. My youngest evicted an inherited tenant with 24 years tenure, from a multi she bought. He became antagonistic, misogynistic & disrespectful to such a young LL. When he told her she couldn't do it she simply replied 'watch me, I do it all day" & she did. Apart from all the financials, she also manages the extensive real estate holdings for the corporation(s) she works for.

Danial Cousino · Answer

@Pat L.

I like the idea of buy vacant property. You can take the 50/50 guess work out of the equation. Having the right PM that know your lease agreement will solidify your ideals on a good tenant and you can stay with in your plan not have to deviate for any reason.

Pat L. · Answer

After many, many years of experience we prefer vacant possession regardless. But we can pay cash & absorb the downtime & interim operating costs. In EVERY case when we inherited tenants, we have had to evict them, some not soon enough. For us it's imperative in a tenant friendly environment & trust me the seller/PM et al will not disclose the idiosyncrasies of the tenants/inmates you are about to inherit.

Recently we did grab an amazing off mkt deal, complete with the promise that all tenants could stay. Then behold all tenants, except one, vacated within a couple of months after possession. We then sold it & hold the note. The vacated units have since been extensively rehabbed, on the new owners dime & the old guy who stayed has been a gem of a tenant.

Scott Wolf · Answer

@Danial Cousino, everyone above makes good points.  I'd just try to be sure that the tenant is paying on time, and verify with Bank Deposits if possible.  I bought my property with 2 out of 3 units rented, and they've both been great tenants so far. (2 years in)

Bruce Lynn · Answer

One of my clients taught me a nice lesson years ago.  He had done a lot of online study and was an out of state investor looking to ONLY buy occupied properties.  There was a long distance flipper who was doing quiet well and probably flipped hundreds of houses here to OOS investors.  He would buy, fix, rent, and then flip to a B&H investor and my client was very interested in being one of those.  While we don't see a lot of that in single family around here, his lessons to me were:

1.  You might give me a rent CMA, but in the end your CMA is a guess.  What if you are off on the downside 10%-20% on rent.  If I buy occupied, I know day 1 what my rent will be.  No guesses.

2. No vacancy from the time I buy until the time I get it rented....that could gain him 10-20% ..1 or 2 months rent on the first year of income.

#1 issue to me these days if you are taking on someone elses tenant is if they are paying and current.  See if you can get applications or copy of the lease during the option period.  See as best you can if they are still working and what their prospects are of continuing to work.

3. No lease fee, again often 1 month's rent.

You might want to see if you can find out why they're selling.  All kinds of good reasons.  Maybe they want to 1031 to a bigger/different property.   Maybe they weren't really investors, but maybe forced investors and want to get their cash out to buy their next residence, maybe they have moved and don't want to long distance invest, maybe they're laid off and need the cash, vs cash flow, maybe they are just tired of being investors, maybe they have a crappy tenant they want to pawn off on you or repairs that need to be done to the house.  See what you can find out.

Mike Reynolds · Answer

Hard to say why people sell. Sometimes they just get tired of collecting rent and want to travel. I worked for a large REI who had his hand in every aspect from industrial to AirBnB. He never fell in love with anything. It was all about whether he could make money off of it or not. I built him a HUGE party barn once with a 75x75 bar in it. Attached was a 5 bdrm house and next to it was 40' X 160' pavillion with outdoor commercial kitchen. Too much stuff to mention really. He moved in. Someone came up and offered him a price and he sold it less than 2 years later. I didnt think he would ever move from there.

Just check the neighborhood and check your numbers. Even if he has mismanaged it then you could manage it right and turn it around.

Tenant occupied good or bad??

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