When to buy (or run from) a tenanted property

OCTOBER 12, 2016

Any landlord or investor knows good tenants are worth their weight in gold. So, it goes without saying that finding a property already occupied by a dependable, trustworthy tenant is something of a bonus for property investors: immediate rental income, no upfront agent fees, confidence in the reliability of the occupant…

But, it isn’t always that easy, so you need to know the ins and outs of purchasing with renters in place before you make an offer:

1. What are the specifics of the tenant’s lease agreement?

Leases stay as agreed when a property changes ownership hands, so as the new owner, you cannot void the current occupant’s lease (i.e. kick them out), and the occupant cannot break the lease without paying the agreed fees. So, do your homework on the tenant and the lease before signing the offer to purchase.

There is always the possibility of a new owner and current tenant coming to a mutual break-lease agreement, but it must be agreed on by both parties.

2. How long has the tenant lived in the property?

In most cases, favourable tenancy agreements are long-term fixed lease tenants who have lived in the dwelling for a significant enough amount of time to prove their level of reliability. “But here you have to watch that they haven’t been there so long, that they’re paying under the market value,” adds Vermaak.

Failing to pass on regular rent increases to quality tenants is a trap that landlords often fall into. “If this is the situation when you buy, you could be faced with the possibility of having to increase the tenant’s rent by large amounts which could jeopardise your tenant in the current economy,” Vermaak warns. “If this is the case, the quality tenant may move on, so be sure to research comparable rents and vacancy rates to ensure you have considered all options before investing.”

3. What is the current tenant paying in rent?

If there’s a tenant in the property paying below-market rent, you need to look at the length of their remaining lease to determine if it’s worth hanging in there at the current rate and then negotiating a higher rent when the lease is up for renewal.

At worst, you will lose your tenant and have to find a new one with increased rental, but this is a calculation you may need to factor into your offer.

4. Suss out the property manager

Property managers do not come with the property, but if a property has a manager, they can be a wealth of information for potential purchasers. But if you don’t gel with an existing property manager, you can choose your own or do the job yourself.

5. Are you being swayed by the current tenancy, or is there a better option?

Don’t be fooled into thinking that a tenanted property means it’s a sound investment.

Thoroughly research the local property market and ask: could I get a better price on another property without a tenant, even if it means being vacant for a period?

6. Are there additional agreements that could cause trouble?

Has the tenant been promised an interior re-paint or a new oven? Or offered to install air conditioners or pay for a garden service? If any agreement has taken place between the landlord and the tenant, then as the new landlord you are also bound.

Go over the lease with a fine tooth comb to check for any unexpected inclusions or agreements, and always ask about verbal guarantees. (Kimberley, I’d say point 6 should be included as part of point 1 as these types of agreements legally have to be included in the lease agreement)

Having an occupied property is appealing, but remember that rental is secondary to owning a property that will increase in value in the long term because of its location, style or amenities,” concludes Vermaak.

What’s available

For R495,000 a 83m2 ground floor flat in the heart of Port Elizabeth’s trendy Richmond Hill, has an existing rental income of R4,500 per month. Beautifully renovated, the two-bedroom apartment has two reception rooms, one bathroom, a garage, pre-paid electricity meter, a working fire place and an alarm system.

Find out more here