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Property is one of the best investments you can make. Becoming a landlord has its own set of challenges, but being able to earn rental income while you gain equity in a home is a great financial situation to be in — especially if you’re in an area where home values are projected to increase.
When you buy a house as an investment property, you won’t always have to find new tenants. Sometimes, they’re already there. Of course, you’ll know whether or not tenants are living in a home before you purchase it, and it’s important to weigh some considerations if the tenants expect to stay there after the ownership change.
Buying a house with tenants can be a great convenience when you’re buying an investment property. It can also lead to problems. In this piece, we discuss tenant rights, landlord obligations, and the pros and cons of buying a house with tenants to help you think through your decision and limit the risks.
What happens when you buy property with tenants?
If you really want to buy a home, but want the current tenants out, you have a couple of options.
First, you could submit an offer on the house that is contingent on the home being vacant at closing. If the seller doesn’t have a better offer, they may incentivize the tenants to leave early. You could set your closing date after the lease terms expire, too.
Second, you can buy the house and then enter into negotiations with the tenant yourself. The tenant is under no obligation to accept new terms if they have a valid lease in place — but if you offer favorable terms or offer to buy the tenant out of their existing lease term, they might be amenable to leaving early. You never know, sometimes tenants are ready to move on, too.
But don’t break the lease. If you do, you could open yourself up to a lawsuit.
What are tenant rights when the landlord sells the property?
When tenants sign a lease with a landlord, that lease persists through a change of ownership. Like an easement, a lease is tied to the land and not the owner so it isn’t impacted when the home changes hands. That lease entitles the tenant to inalienable rights.
Tenant rights vary from state to state, but the most important takeaway for new landlords everywhere is that you cannot violate the terms of an existing lease. You can’t raise the rent, modify any lease clauses or agreements, or evict a tenant before the end of a lease term just because you want a new tenant.
Some states may have laws that are more favorable to landlords while others may lean towards tenants but regardless of where you buy, make sure you review the existing lease before buying a home with tenants.
What are landlord obligations?
Landlords have a number of legal obligations to tenants, which you inherit when you buy a house with them. That goes beyond honoring the existing lease — there are local and state codes you must uphold as well.
The most important philosophy for all landlords to remember is that you must maintain a safe and habitable property for your tenants. The standards of “safe and habitable” vary between states, but at a minimum they include:
- Keeping common areas like hallways and stairs in a safe, clean condition
- Ensuring all structural elements like floors, walls, stairs, elevators, and roofs are safe and intact
- Maintaining electrical, plumbing, HVAC, ventilation, and sanitary systems
- Providing access to running water, hot water, and heat
- Providing trash containers and trash removal
- Managing known environmental toxins, like lead and asbestos
- Exterminating rodents and other vermin or insect infestations
- Responding to any tenant-requested repairs promptly
Before you buy a home with tenants — or a home you plan to eventually rent — make sure you understand local laws and any specific lease terms. The previous landlord may have been getting away with not meeting habitability standards or were providing a service like paying for utilities as dictated by the lease.
When you buy a home, you inherit all of the responsibilities of maintaining that home. If that includes tenants, you have an additional set of legal and contractual obligations you must be ready to honor.
Can the landlord change or terminate a lease?
When you buy a house with tenants, pay special attention to the lease term. If a fixed-term lease is in place, the tenant has a legal right to occupy the home for the duration of the lease.
If the tenant has a month-to-month lease, however, a new landlord can terminate the lease or increase the rent before the start of a new month. You must give appropriate notice (typically 30 days, but different states may have different rules based on how long the tenant has occupied the property). This gives new landlords a bit of flexibility.
A landlord can terminate a lease early in a few instances. First, if a lease specifies that the landlord (the original owner/seller) has the right to terminate the lease when they sell or transfer the property, a sale will legally terminate the lease. Likewise, if you buy a home as a result of a foreclosure, each state has rules regarding notice to vacate.
Lastly, if you plan to use a home with tenants as your primary residence, you might be able to invoke an owner move-in eviction (OMI). Not all states offer this option and the rules vary, but the general idea is that if you move into the home within a prescribed number of days of the eviction and live in it as your primary residence for a minimum of years (typically one to five), then you can terminate the tenants’ lease.
Should you buy a house with tenants?
Whether it’s a good idea to buy a house with tenants comes down to your personal situation and preference. There are advantages and disadvantages to buying a house that’s already occupied by renters depending on what your goals are for the home or as a landlord.
- No need to find new tenants: This can be a long and expensive process in certain housing markets. And you could wind up with awful tenants. Existing tenants with a proven track record of paying on time and respecting the property can feel like a godsend.
- Immediate rental income: A home is expensive. Being able to immediately start recouping your purchase or reducing the impact of your mortgage payment is very valuable.
- The property is usually up to code: When you’re buying a home, you’re sometimes left wondering if certain renovations were done with the proper permits or if all aspects of the property are up to code. Buying from a reputable landlord can give you the peace of mind that they’ve kept the property in good shape to satisfy landlord obligations and keep their tenants happy. Your lawyer will help you confirm that the previous owners complied with all legal requirements — which will start you off on the right foot as a landlord.
- Legal risk: Any new homeowner inherits the responsibilities and liability associated with a property. That means anything that doesn’t meet the legal requirements could leave you open to a lawsuit from tenants who may not be thrilled to have a new landlord. Make sure a real estate lawyer finds proof that the previous owners have done everything up to code and kept the house up to standards of habitability.
- Honoring lease terms: Many leases are standard, boilerplate, and easy to honor. Some are not. The previous owner may have agreed to pay utilities or allow pets, and you don’t want to do the same. If the tenants are on a fixed-term lease, you’re stuck with these conditions. If you want to make changes or evict a tenant, the lease will make it exceedingly difficult — maybe even impossible — to do so during its legal tenure. That could be an irritating burden to bear depending on how long the tenants are locked in.
Buying property is a smart financial investment. But as with any investment, you have to be smart about it, too. When you buy property with tenants, make sure you understand their existing lease terms, know their reputation as tenants, and fully comprehend the relationship and agreements they had with the previous owners.
Inheriting tenants can be great for your bottom line as it could begin instantly yielding returns on your investment. It could also become a massive legal headache if you find you’ve bitten off more than you can chew. Make sure to review the existing lease and talk through the opportunity with your real estate agent and lawyer before making the decision to purchase.