Rookie Reply: Pros & Cons of Inherited Tenants

Ashley:
This is Real Estate Rookie episode number 84.
I’m Ashley and I am here with Tony Robinson. We are your co-hosts of the Real Estate Rookie podcast and today we are back with another episode of The Rookie Reply.
Tony, what is going on today?

Tony:
Life is good today. I can’t complain. You know what? Actually, I haven’t told you this yet, but I got recognized in person for the first time by a Bigger Pocket audience member. I was at my brother-in-law’s restaurant-

Ashley:
You can say fan. It’s okay.

Tony:
I was at my brother-in-law’s restaurant. He owns a restaurant here in SoCal, and someone comes up to me and they’re like, “Hey, are you Tony Robinson?” And I’m like, “I am Tony Robinson. How did you know that?” And then yeah, he said, “Oh, I listen to the podcast.”

Ashley:
Are you sure they didn’t say, “Are you Tony Robbins?”

Tony:
He was like, “Aren’t you Ashley’s co-hosts? I can’t really remember what your name was, but”-

Ashley:
Oh, that’s exciting. That’s so cool. I bet it was really nice to talk real estate a little bit with him.

Tony:
Yeah, just for a little bit. Yeah, it was cool.

Ashley:
Cool, cool. Yeah. Let’s get into our Rookie Reply today. Today, we’re going to be talking about inherited tenants and what it is like when you purchase a property and there’s tenants already in place. Today’s Facebook question, now we pulled it from the Real Estate Rookie Facebook group, so if you are not a member, make sure you search Real Estate Rookie on Facebook and join our group. We are continuously growing every day. Tony, what are we, around like 30,000 members?

Tony:
Yeah. We’re a little over 30,000 I think now. It’s creeping up every day. And what’s more important, guys, is that it’s a very active group as well. Ashley and I talk about this. Sometimes we try and go into the group to add value, but so many people have already commented on posts that there’s not even a whole lot for us to say that hasn’t already been said, so super engaged in an active group for sure.

Ashley:
Okay. Today’s question is when you purchase a property with a tenant already in the middle of their lease, can you increase the rent or do you have to wait until their lease is up?
That’s pretty straightforward answer is depends on the lease. Is it a month-to-month lease or a one-year lease or a two-year lease? If their lease is not up yet, you have to wait until their lease is up. If they’re on a month-to-month lease, you can give them notice that you’re going to increase their rent or you can give them notice that when their lease is up, you are going to increase it if, say, they have six months left on the lease.
And look at your state laws, because some states like New York state, they have different requirements as of the time period for you to give notice that you’re not going to renew a lease or that you are going to increase the rent. I believe … I don’t know exactly, but it’s something like if the person has lived there for less than a year, it’s 30 days notice. If they’ve lived there for two years, it’s 60 day notice. Any longer than that, you have to give maybe 90 days notice. Make sure you know, your state laws and regulations, too, when you are giving notice that you’re going increase the rent.
Tony, what do you have to add?

Tony:
Yeah, I guess the only thing I’d add is that sometimes there are situations where maybe there isn’t a lease in place, right, like the owner, the landlord, their current owner doesn’t know where it’s at or can’t remember what it was. And I haven’t purchased a property where I’ve inherited a tenant, but in talking with some of my other investing friends, one of the things that they use is called an estoppel agreement. And basically you just get the current party, so the owner, the landlord, and the current tenant to sign this estoppel agreement saying, “Hey, here’s where we believe the current terms of the lease to be.” That way, when you step into it as the owner, you’re not surprised by, “Oh, the owners told me that this was what was happening, but the tenant thinks that this is what’s happening,” and then you’re stuck in between a rock and a hard place, so an estoppel agreement as a way to get past that ambiguity.

Ashley:
Do you want to spell that for us real quick?

Tony:
Yeah. I actually had to look it up too because I wasn’t sure either, but it’s E-

Ashley:
No, it’s E-S-T-O-P-P-E-L, right?

Tony:
Oh, there you go. All right, you got it.

Ashley:
Yeah, no, I have used these before, and I’m so glad you brought that up. I didn’t even think about that, but that is such great advice. And you can just Google it online. That’s what I did when I used one. But yeah, it is great to verify what that seller is telling you, especially if they don’t have a written lease. That’s such a great point.
And you can do that before closing. Ask the seller’s permission to send these and you send them to the tenant and you have them mail them back to you directly or maybe you meet them in person, but that way you’re getting a sense of what they think that their lease terms are and what they say so that if there is a mismatch of information from the tenant and the seller, you can figure that out before you actually close on the property, because there’s been instances where I’ve taken over management of a building and they’ve said, “Well, my security deposit was this much. I put this much more down,” and I actually had to pull out the estoppel agreement and say, “Here, you signed that it was this amount way back then, even though you didn’t have a lease agreement with that landlord.” Definitely can be very useful to you, and also getting the condition of the property, too.

Tony:
Yeah, always good to just CYA and make sure you’re covering all your bases in that sense. Ash, I guess I want to get your opinion on something, right? Right now we’re still in the middle of this pandemic and there’s still a lot of eviction moratoriums going on in places. Would you be more hesitant today to purchase a property with an inherited tenant than you would be early 2020?

Ashley:
Let me tell you a quick little side story first. I saw this news article, and it was from a Lancaster, which is outside of Buffalo, New York, and a landlord had two tenants inside that were not paying rent and so he spray painted their names on the roof so that everybody that drove by could see that, “So-and-so owes me $11,000 in rent,” and it made the news and it’s a big controversy like, “Was this right for him to do or not to do?” But yeah, our property management company had sent an email to the owner recently just saying, “This is going to be really detrimental to a lot of landlords not getting rent and not being able to evict.”
For me personally, if I was buying a property with inherited tenants, I would do the estoppel agreement and I would ask the seller, “What’s rent at?” And that’s something to put on the estoppel agreement, too, “When’s the last time you paid?” And you can also ask for bank statements to verify that the tenants actually did pay. If they were paying tenants, I would purchase the property. If they were not paying tenants, I would look at, am I getting a deep, deep, deep, deep discount and can I offer them cash for keys, give them $1000, pay for them to get a U-Haul and help them move somewhere else? That would be my take on it, but I definitely wouldn’t stop buying or stop looking at properties just because there was inherited tenants in there.

Tony:
We’re looking at a property in Joshua Tree right now off of direct-to-seller marketing that we’ve been doing. And the owner lives, I don’t know, somewhere on the east coast, and he’s like, “Hey, you guys can have the property for almost whatever price you can figure out if you can get these squatters out of the property.” He was like, “I don’t really know how long they’ve been there.” He’s got no grasp of what’s actually happening there. We’re going to see if we can, like you said, maybe offering some cash for keys to get out, and then we will get the property at a pretty steep discount because he just kind of wants it off his hands, so ways to be creative.

Ashley:
Yeah. You have to keep us all updated on this and how this pans out for you.

Tony:
We’re also a little nervous to go to the property because he doesn’t even really know who these people are. Are they going to try and run us off when we get there?

Ashley:
Right. Oh yeah.

Tony:
Yeah, we’ll see.

Ashley:
Huh. Well, be careful.

Tony:
If you guys see me posting on my Instagram story running out of breath in the desert hills of Joshua Tree, you’ll know why.

Ashley:
Doing your last testimonial on Instagram Live. My name is Tony Robinson. It is May 25th at 4:00 PM. I’m being chased through Joshua Tree.
Okay, well, we’ve gotten way off track for today’s Rookie Reply, but we hope we gave you guys a little bit of tips, tricks and advice for dealing with an inherited tenant, but do not be scared of an inherited tenant. If you’re going in and you’re looking at properties before you’re purchasing, you can see if they’re taking care of the property. You can talk to the neighbors to see if they are a problem tenant if issues do come up, if the cops do come there. There’s definitely ways to do your due diligence because buying a property with tenants in place can be really nice because you’re getting that cash flow right away and you don’t have to place a tenant in there.
Hey, anything else Tony?

Tony:
No. No. I think you hit it all, Ash. I feel like we gave them a lot of good stuff today.

Ashley:
Thank you guys for listening to today’s Rookie Reply. I am Ashley at Wealth From Rentals and he’s Tony at Tony J. Robinson. And even though he was just spotted recently, he did have another huge compliment here. David Green, host of the Bigger Pockets real estate podcast, complimented him on his smooth voice.

Tony:
My smooth DJ radio … Hey ladies and gentlemen. No.

Ashley:
Which I 100% agree. Well, thank you guys and we will be back on Wednesday with another episode.