If you are investing in a single-family rental property or multifamily property, you will one day be faced with inherited tenants throughout your real estate investment career. Tenant occupied properties provide investors with a tremendous amount of information and delivers seasoned investors a massive opportunity for future growth within that asset. With any investment, the most critical part of your execution is doing the work and due diligence behind the venture. Today, we want to provide you with some information on what you need to request when purchasing a tenant-occupied rental property and some essential tips to handle inherited tenants from previous ownership successfully.
Before The Purchase
Through your many hours of hunting for the perfect rental property, you've finally found the one that fits your investment needs and strategy. You see, in the description, the property is tenant occupied and producing a one year NOI of $x and a solid cap rate. That's awesome, it's turnkey and already generating cash flow. Here are the items you should get your hands on to make sure you aren't inheriting a problem tenant.
Copy of Lease Agreement(s)
Request Lease Agreement(s)
As the property transfers to you, so will the tenants occupying the property. Meaning needy Nacy in unit 102, the previous owner had such a hard time with, now becomes your headache. It's important to know when the lease agreements will expire and the terms of the contract you will be operating under until you get a chance to screen, renew, or non-renew with your inherited tenants. Also, check to see when the previous owner renewed with the tenants in place. Just before selling or even under contract (if not stipulated), the owner or management company may end up renewing the lease agreement with current tenants, and you're stuck with them for the next year.
It's very likely the property you're purchasing belongs to a mom-and-pop landlord that has had a tenant living in the property for the last seven years. They've been accepting cash payments, collecting rent when the tenant had it, and likely won't have a tenant ledger. That doesn't mean it's not a great investment property; in fact, it might be a stellar hidden gem with tremendous potential with a little TLC and experience behind it. The properties managed by a property management company or a large institutional investor will have a tenant ledger on file. From our experience, the tenant ledger tells a lot about the tenant occupying the property. If you see late payment after late payment, with late notices posted month-after-month. Make sure the lease wasn't recently renewed, as you'll likely have a hard time training that tenant on how things will operate under new ownership.
Knowledge is power, and the more you know about your inherited tenants, the better. If you're able to collect the applications on the tenants, your life will be so much easier. You'll have all their contact information in one place to streamline your take over. Making contact and setting up a meet n greet will be much easier. You'll likely know their occupation, employer, and income. You'll still want them to reapply through your system or with your management company if you plan on renewing with them. Again, with inherited tenants, the more information you have, the better.
Know what you're buying and whom you are buying. If you have the opportunity to view the property in person, and you have the luxury of meeting the tenant during your tour. Ask feeler questions about the home. They'll be more than happy to point out all the flaws of the property. But at the end of the day, take it with a grain of salt. Have your proper inspection done and account for the appliance. There is nothing worse than having your perfectly fitted stackable washer/dryer vanish six months after the purchase when your tenant moves out and learning it was the tenants.
How to handle Inherited Tenants?
Inheriting tenants is not a bad thing or a deal-breaker at all. It shows the property has a history as an income-producing property. You will come across really great inherited tenants and some not so great ones. The ones you can't change or train on how the property will operate with you being the new landlord. You'll hear time and time again, "My last landlord allowed me to pay on the 10th, or it wasn't like that before." As a property management provider, we see this all the time. As a property management company in Orlando, we genuinely believe you've got a 50/50 chance on whether or not you can train a bad inherited tenant. A good inheritance will go smoothly, and the only reservation they'll have is the concern that their rent is going to increase substantially. If you perform a proper meet n greet, provide them with new instructions on how things will operate and the plan going forward. You'll likely get a much better response from your more reserved tenants. Your bad tenants will always be difficult no matter what you do. They’ll end up having to go.
Inherited Multifamily/Apartment Tenants
Taking ownership of a multifamily property or apartment building has its own challenges. As the landlord, setting the standards right from the start with your tenants is crucial. Provide everyone with the same information and instructions. Get your inherited tenants on a month-to-month lease agreement, vetted. If qualified, get them on your lease agreement. If not, cut them loose. Be upfront and open with your inherited tenants if the units are under market value. Let them know the rental rate will be increasing by $x amount and what types of capital improvements you have planned for the community. Turning, flushing out your bad tenants, and creating an improved community for a multifamily property can take 12 to 24 months. Having your good inherited tenants screened and approved under your qualifying policy as soon as possible helps tremendously from an operational standpoint. Your late payers, trouble makers, and unruly tenants serve your Notice of Non-Renewal in compliance with the inherited lease and start fresh.
It's like when your Great Uncle's second cousin dies, and you find out they left you a vast inheritance. You have no idea what it could be. You're hoping it's a nice stack of cash and naming you the heir to the hotel empire like your boy Mr. Deeds. Unfortunately, that is not always the case. Wishful thinking aside, an inherited tenant can work out great, or you can get stuck with a bad tenant. It's how you approach, prepare, and position the right people in place to make your real estate investment a success. If you're experiencing issues with an inherited tenant or merely having a hard time managing your new rental property, feel free to reach out to us here at The Listing Real Estate Management, the most reliable property management company in Orlando, Florida; we are here as a resource to you and would love to help in any way we can.