When buying an investment property, is purchasing one that is already tenanted a good idea?
The short answer is usually yes because after all that’s what you’re after – someone to support your cash flow by helping you meet your monthly investment loan repayments.
But buying a property with a tenant can have some downsides as well as benefits and so you need to take some important steps before you sign on the dotted line.
Before we look at these steps let’s take a look at some of the advantages and disadvantages of buying a tenanted property:
Advantages
- The first and most obvious one of course is that you get immediate rental income. This will help your cash flow management as you won’t have to worry about any vacancy period – you get cash in day one.
- Secondly, because you have a tenant you don’t have to spend time, money, and effort finding one. This will save on advertising costs and the worry that your investment is not generating cash flow. You may also save on cleaning and related costs since there is no need to prepare the property for viewing.
- Finally, there’s a certain level of comfort knowing your investment is relatively secure – you have a tenant (hopefully a long-term one) and your core focus can be on establishing a good relationship with him or her and maintaining your property.
Disadvantages
- While existing tenants offers security, it also means you’re stuck with them until the lease expires. This could be problematic if you have unsuitable or demanding tenants or you want to increase the rent, which you can only do if permitted by the lease.
- Aligned to this is where you may wish to undertake renovations or repairs. This could be complicated by the terms of the lease and you may have to pay the tenant compensation for any inconvenience or lack of access to the property if you decide to proceed.
- Finally, you may have inherited a lease that is about to expire or tenants who are off-lease meaning they can vacate at short notice. In either case you may find your property becomes vacant very quickly and you’re back to square one.
10 steps to protect your investment
Before you proceed to buy your investment property, here are 10steps to help minimise your investment risks…
1. Review the lease in detail and seek independent legal advice
Make sure you understand all the terms and conditions and what is and isn’t included.
For instance, you need to check on things like the length of lease, how and when rent may be increased and renewal options.
You also need to be clear about what is and isn’t included in the lease payment.
For example, some lease payments are all-inclusive covering things like utility, garden and maintenance and even internet costs.
It’s important that you understand who is responsible for what outgoings.
This is very important for budgeting and cash flow management.
2. Talk to the managing agent and find out what sort of tenant you’ll inherit
Ask questions like: Do they pay on time? Are they in arrears? Have there been any problems? Have they been looking after the property? Have inspections revealed any issues?
3. Make sure you inspect the property
Not only will this reveal its general state of repair but it will also give you a sense of how the tenants live and maintain the property.
4. Check rental yields for the street and suburb and compare them to the one you are considering
Look for any major variances remembering that you won’t be able to increase the rent until the end of the lease.
5. Investigate whether there are any additional agreements or arrangements, particularly verbal ones, in place
For instance, check whether the current owner has agreed to say, upgrade the kitchen, paint the house or undertake repair work.
These may become your responsibility if you buy.
6. Check the bond has been lodged properly – a check this actually happens when settlement occurs
7. Query how often the property is inspected and make sure you are comfortable with the frequency and outcomes of each inspection
For instance, are they occurring often enough and are they revealing any problems?
8. Compare the property condition report to your own observations
Is it accurate? If you have any doubts, bring in the experts and arrange for an independent property and/or pest inspection.
9. Investigate the performance of the Property Manager
Have they done a good job and have they been attentive to the needs of the current owner?
You can learn more by speaking to the current landlord and jumping online to do your own research.
Remember, if you’re not happy you can always change agents.
10. Don’t be seduced into buying an investment property just because it has a tenant
Remember, your decision to buy must be based on sound property fundamentals.
