Buying a Property with Tenants: What You Need to Know
When you’re buying an investment property, you often expect to receive an empty house and a fresh set of keys. However, sometimes you inherit a property with tenants already living in it. So, what do you need to know about buying a tenanted property?
Benefits and Challenges of Buying a Tenanted Property
Buying a tenanted house or apartment can simplify things if you already intend for that property to be an investment. These tenants will become your tenants, at least until the lease expires or you mutually agree to end it early. However, it can also bring about its own complications, so it’s important to understand your rights and responsibilities as a landlord before buying a property with tenants.
Know Your Tenants
In a typical scenario, landlords choose their tenants from a range of prospective candidates. But in this situation, that choice is taken away from you. It’s crucial to find out as much as you can about the tenants you will be inheriting, as they will be the ones paying the rent and (hopefully) keeping your property in good condition. Here are some questions to ask the seller about the tenants:
-
- What do they do for work?
-
- How long have they lived there?
-
- What is their income?
-
- Do they have any pets?
-
- How many people live there?
-
- How often do they pay the rent?
-
- Do they pay the rent on time?
-
- Have there been any problems or complaints from neighbors?
-
- Are they reasonable with maintenance requests?
If you discover multiple missed payments, lease breaches, or property damage, these could be grounds for early termination of the lease.
Understanding Lease Agreements
The current lease will either be a periodic lease or a fixed-term lease agreement.
-
- Fixed-Term Lease: If the lease is a fixed-term agreement, it must be honored, and the tenants can stay until the end of the agreement. Exceptions include the tenants breaking the lease early or grounds for early termination.
-
- Periodic Lease: If the lease is a periodic type, you need to give the tenant 60 days’ notice to vacate, provided you do this during the settlement period or before the purchase is complete.
Want Insider Access to Exclusive Property Deals?
Is It Cheaper to Buy a Tenanted Property?
In some cases, it can be cheaper to buy a tenanted property as you avoid costs associated with finding new tenants and can start collecting rent immediately. However, if you plan to renovate the property before renting it out or if the property is undervalued, it might not always be cheaper. Additionally, you might have to wait until the lease expires before asking the tenants to leave.
Responsibilities and Obligations
Once you buy a tenanted property, you have several responsibilities:
-
- Property Manager: Many landlords hire a property manager to handle their investment property. If there was already a property manager, you’re not obligated to continue with the same one, but it can provide consistency.
-
- Self-Managing: If you choose to self-manage, you must inform the current property manager, obtain copies of all tenancy agreements and related documents, and ensure the tenant has your contact details. Also, update them on how to make rental payments going forward.
Important Consideration: Local State Laws
Please note that tenant and landlord laws can differ slightly in each state. It’s essential to check with your local state laws to ensure compliance. This is where Buyers Agency Australia can help. We navigate through these situations, ensuring you understand and adhere to all local regulations, making the process smoother and more efficient.
Tax Incentives for Property Investors
Buying a tenanted property comes with tax benefits that can enhance your financial position. You can claim deductions on:
-
- Interest on Loans: Loans used for investment purposes can accrue substantial interest deductions.
-
- Rental Expenses: Including advertising for tenants, council rates, insurance, and property management fees.
-
- Depreciation: Both buildings and fittings can be depreciated, providing valuable non-cash deductions.
-
- Loan Costs: Such as establishment fees and mortgage insurance, which are deductible over several years.
-
- Accounting Costs: Fees for tax preparation and advisory services are also deductible.
Buying a property with tenants can be a smart investment move, but it’s crucial to understand the complexities involved. At Buyers Agency Australia, we can guide you through every step of this process, ensuring you make informed decisions that enhance your financial security.
Ready to explore the benefits of buying a tenanted property? Let’s connect and discuss how we can support your investment goals with expert advice and strategic planning.
