A smart real estate investor’s goal is to start earning revenue on an investment as quickly as possible. One way to do this is by buying a property with tenants already living there.
The minute you walk away from the settlement with your new keys in hand, your new Arizona rental property is already generating income. Next month, you’ll receive a fresh check (or electronic payment) without the hassle of searching and qualifying tenants.
While this seems like a dream come true, especially for first-time investors who want to become landlords, there are some caveats you should be aware of when buying a property with tenants.
If you’re on the hunt for your next investment and considering a property with tenants, we have some helpful tips to help you decide if it’s the right move for your portfolio and experience.
Pros and Cons of Buying a Property with Tenants
There are two sides to every coin. If buying a property with tenants sounds too good to be true, it’s because some circumstances can make it more difficult than helpful.
As any great real estate investor does, it’s crucial to weigh the pros and cons.
Pros:
- Start earning immediate ROI
- Save time and money acquiring tenants
- Rent price already set for the market
Cons:
- Could be stuck with bad tenants
- Experience landlord-tenant issues
- Rent could be priced too low for the market
These cons aren’t the end of the world, though!
Leases have expiration dates, and once they end, you can refuse renewals so that you can find higher-quality tenants. We’ll dive deeper into this later on.
Super Helpful Tips for Buying a Property with Tenants in Phoenix
When purchasing a property with tenants already living there, there are a few things you should consider and do before going to the final settlement.
These tips will make the transition of the property and the tenants into your care seamless and pleasant - for both parties.
Review the Lease
After putting an offer down on a rental property in Phoenix that you wish to acquire, the next step is to review the agreed-upon lease with the current tenants.
It’s important to understand that this lease does not terminate simply because there is a new property owner. Unless, of course, there is a clause in the lease stating that transfer of ownership does terminate the lease - there are cases of this.
If the lease lacks this clause, the lease transfers. As does the rent price, expiration date, late fees, and clauses.
When the lease expires, you can decide whether or not to renew with the current tenants.
Request Security Deposits
Normally, Phoenix tenants put down a security deposit equal to one month or one and a half month’s rent when moving into a property. At the end of their lease, if they return the property in good condition, they will receive the security deposit back.
As the new property owner, you will be responsible for returning the deposit. So, during negotiations, request these security deposits from the current owner. This could also be represented as a “discount” on the property purchase price.
Introduce Yourself to the Tenants
You want to start off on the right foot with your new tenants. It’s a good idea to introduce yourself in person, via email, or by phone. Although to make a great first impression, in-person introductions are ideal.
Beginning a landlord-tenant relationship on good terms can save you a lot of trouble and headaches in the future.
Discuss Tenant Backgrounds
It’s good practice to conduct tenant screenings while filling a vacant property. These screenings and interviews help to avoid late rent payments and potential evictions.
Discuss the backgrounds and screenings of the current tenants with the landlord to understand what type of people they are. Do they pay rent on time? Have there been issues in the past?
This is crucial information to have as you take on responsibility as their new landlord.
Search for Month-to-Month Leases
If you are on board with buying a property with tenants but are still nervous about getting stuck with a bad tenant, search for properties that have month-to-month lease tenants.
A month-to-month lease renews each month, providing you with more flexibility. Essentially, this means you can terminate the lease with just 30 days’ notice to the tenants. So, if you decide the current tenants aren’t a good fit, you can ask them to leave - legally.
How to Get Rid of Tenants Living in a Property You’re Purchasing
If you are worried about getting stuck with bad tenants when purchasing a property, there are two legal methods to get rid of them.
Request a Contingency
When you find the perfect rental property in Arizona, you can request a contingency for the landlord to break the lease with the current tenants.
This contingency states that you will not move forward with the purchase unless the lease is terminated and the tenants move out.
It’s important to note that only the current owner and landlord may legally terminate the lease.
Cash for Keys
Another method of legally getting rid of tenants is to offer a cash-for-keys agreement. Essentially, you or the seller will offer the tenants cash for them to walk away from their lease.
This amount usually covers the cost of moving and a little extra for them to be comfortable.
The Key to a Smooth Transition Buying a Property with Tenants in Phoenix
Becoming an instant landlord when buying a property with tenants in Phoenix, especially a first-time landlord, can be overwhelming and come with obstacles.
The key to a smooth transition to acquiring tenants in a new property is with a reliable and professional property management company like Brewer & Stratton Property Management.
As the leading property management company in Phoenix, our team manages hundreds of residential rental units, keeping both our owners and their tenants happy.
You’ve done the hard work of finding the perfect property, let us do the rest with your newly acquired tenants!
If you found this article informative, make sure to read How Do I Know If an Investment Property Will Be Profitable? next!
