Posted about 7 years ago

Are Inherited Tenants a Good or Bad Thing?

Investment properties come in all shapes, styles, and qualities. They can also come with or without tenants. If you’re buying a property that already has tenants in place, you may be feeling pretty excited about the immediate income they’ll generate for you. This can definitely be a positive factor. However, there’s also a possible downside to already-tenanted properties - you can’t be exactly sure what you’re getting into.

Pros

The biggest advantage to purchasing a tenanted investment property is that you’ll make income right away. The moment you take possession, those rent checks will start coming to you. There’s no vacancy you’re trying to hurry to fill, no marketing of the property, no screening tenants. All of that has already been done by the previous owner, so that takes a huge task off of your plate.

Cons

Now for the disadvantages. For starters, you don’t know anything about these tenants. Since you didn’t screen them yourself, you have no idea what kind of people they are and whether they’re even good tenants or not. You also cannot change the terms of the lease they signed with the previous owner, so if there’s something you don’t like about it, you’re stuck. The amount they’re paying each month, the length of the lease, and every other term they agreed upon stands until the lease is up.

Protecting Yourself

This brings me back to my original question - is it a good or bad thing to inherit tenants with a new property? The answer is that it can go either way. You could completely luck out and get awesome tenants who pay when they’re supposed to and treat your place like it’s their own. Or you could get really crappy ones who “forget” when rent is due, knock holes in your walls, and say they own all the appliances when they don’t.

In an uncertain situation like this, the best thing you can do is protect yourself with an estoppel agreement. This is a legal document that is completed and signed by the tenants and the previous owner. It details all the pertinent information about the lease agreement between the two parties. Common questions to ask on the estoppel form are:

What are the terms of the lease (i.e, how long is it, when was it signed, when will it terminate)?
What is the monthly rental amount?
Is the tenant current on rent payments?
How much was the security deposit?
What utilities is the tenant responsible for? Which ones is the owner responsible for?
Who owns what (i.e., appliances, furniture, lawn equipment, etc.)?
Does the property need any repairs?
Are they any other agreements that have been made between owner/tenant?

This agreement can be your saving grace if problems arise after you take ownership. You should ALWAYS get one before purchasing a tenanted property. It also helps to talk with the tenants, explaining that an ownership transfer is occurring, and asking them if they have any questions. Making an effort to create a positive relationship from the very beginning can save you trouble later on.

Inheriting tenants can be a nightmare for sure, but it doesn't HAVE to be. If you feel truly uncomfortable with the situation, move along and look for an empty property. However, if you want a property that is going to generate income immediately, buying a tenanted one is the way to go. Just make sure you protect yourself with an estoppel agreement and start the process off with open communication between you, the previous owner, and the tenants. Taking these steps will help ensure a successful transition with fewer problems now and in the future.