If you’re considering buying a property as an investor, the listing agent will usually emphasise the fact that the property is tenanted.
So that’s a good thing right?
Well, yes and no. Let’s explore the pros and cons of buying a property with existing tenants, and the questions you should ask to find out exactly what you’re dealing with.
The obvious benefit of existing tenants is you have cash flow from day 1. You’ll know exactly what rent you’ll receive as soon as you take possession. You won’t need to worry about how you’ll pay the mortgage for several weeks while your agent tries to find a tenant.
Secondly, existing tenants are a known quantity. You’ll know whether they pay their rent on time and you’ll know how well they keep the property maintained. You’ll also know if they’re inclined to keep car bodies in the front yard, in which case you will run in the opposite direction.
The flipside to having entrenched tenants is that you may be inheriting bad ones. Are they often in arrears with their rent? Are they on the phone every week complaining about minor wear and tear items? Do the neighbours have the drug squad on speed dial?
There’s also the value of the rent to consider. Sometimes as is the case with long term tenants or laid back property managers, the rent may be below market. Combine this with a long lease term, and it may be some time before you can get a market-comparable return.
What to ask
You have two allies in understanding what you’re taking on: the agent and the existing property manager. The trick is in asking the right questions:
Ask the selling agent:
- Are the tenants on lease or month to month arrangement?
- If there’s a lease, when does it expire?
- What is the current rent?
- What is market rent in the area for comparable properties?
- Insist on copies of the lease and any agreements as part of the purchase contract
Ask the property manager:
- How is your relationship with the tenant?
- How long have the tenants been in the property?
- Has the tenant indicated if they wish the stay on in the property or vacate?
- In the last 12 months, how consistently have they paid their rent on time or in advance?
- How well they look after the property and what maintenance requests are outstanding?
- When was the property last inspected?
- Does the property have high or low turnover in tenants?
This is a good opportunity to evaluate the current property manager and if you’re not happy, make a switch. Bear in mind that just because there’s an existing property manager, you’re not contractually obliged to continue with them. For 10 simple questions to evaluate your property manager’s performance, download our free eBook titled, ‘10 ways to rate your Property Manager’.
Once you’re satisfied with your property manager, and your tenants, you’ll want them to have a chat about a long term lease at market-comparable rent.
– Owen Davis
About Owen Davis: Owen Davis is the Principal of DFG Property, a full service property management, finance & sales firm based in Sydney. Owen has over 15 years experience in property financing, real estate and property management. More than a third of his clients are among the top 10% of property investors in Australia.