The Problem With Buying a Property With a Tenant
In +15 years of dealing with residential and commercial real estate, I have never seen an investor selling a performing asset. All (100%) of the investor-owned properties were losing money. The most common reasons were deferred maintenance and or tenant issues. In this post, I will only talk about tenant issues.
Tenant issues include
- Below Market Rent - A common problem, especially with self-managed properties, is tenants paying below market rent. In such cases, raising the rent to match the market and keeping the tenant may not be feasible.
- Not consistently paying the rent - This is more common in locations with rent control and such. In these locations, it may be difficult to impossible to remove a non-performing tenant. Owners may choose to sell the property instead of going through the eviction process. Ask the seller for bank statements and look for rent deposits. Bank statements are difficult to fake. Also, interview the tenant. Ask them what rent they are actually paying.
Under what conditions does buying a property with a tenant make sense? If ALL of the following are true.
- A review of the owner’s bank statements shows constant and on-time rent payments.
- The current rent is at or near market value.
- After evaluating the tenant, your property manager agrees that keeping them is a good idea.
- I do not recommend buying a property with a new tenant. The tenant must have been in place for more than one year so you have some record of performance.
Although the idea of purchasing a property with a tenant already in place may seem appealing, you could end up paying extra for a non-performing tenant.
