How to Buy or Sell a Rental Property

3% of Americans are real estate investors who are “actively seeking to buy property within the next 12 months,” according to BiggerPockets. If you’re one of the 9.5 million people who are looking to buy a rental property in the next year, you may find yourself buying a property with current tenants. Similarly, you may end up selling your property while tenants live there.

In this article, we’ll help you buy or sell a property with current tenants.

If You’re Buying a Rental Property With Current Tenants

Fixed-term leases do not expire when a property is sold. The lease will transfer from the previous owner to you.

Some leases have a clause that gives the landlord the right to terminate the lease in case of sale, typically with 30 days’ notice. If this is the case, the owner could terminate the lease before selling to you.

Learn more about important rental lease clauses.

Is it Good or Bad to Buy a Property With Current Tenants?

Buying a property with current tenants can be helpful, as you already have tenants paying rent. This will help you save time because you won’t need to find and screen new tenants. However, not all tenants are quality tenants who will take care of your property and pay rent on time.

How Can You Find Out If Current Tenants Will Be Quality Tenants?

To find out if tenants are quality tenants, we recommend following these two important steps:

  1. View the property to make sure it is in good condition.
  2. Ask the owner for rent payment receipts and tenants’ credit reports to see if the tenants are paying rent on time.

If you’re still interested in moving forward, you should also:

  • Ask to view the existing lease and review it thoroughly.
  • Ask the owner to transfer the security deposit to you.

If the owner doesn’t give you the deposit, you’ll still be responsible for returning the full deposit to your tenants at the end of their tenancy. It’s in your best interest to ask the previous owner for it as a condition of the sale.

Keep in mind that requesting to view the lease, rent receipts, and any other material are all requests the owner could deny. You could make these “conditions of the sale.” For example, you’d add a line in your offer that states, “This offer is contingent upon viewing and accepting the current lease.”

If the owner is motivated to sell, then he or she will likely provide the documents that you requested.

The bottom line is you need to make an informed decision when buying a rental property, especially a property with existing tenants.

If You’re Selling Your Rental Property With Current Tenants

Selling your rental property with current tenants means you’ll need their cooperation throughout the process. You’ll need to show the property to prospective buyers and keep the property clean, while tenants still live there.

What Are Your Options If You Don’t Want to Sell With Current Tenants?

One option is to wait until your rental lease expires before putting your property up for sale. That way, the property can be cleaned, shown easily to prospective buyers, and there will be no hassle with leases and tenants.

Keep in mind some leases have a clause that allows you to cancel the lease with 30 days’ notice in the case of a sale.

If you’re on a month-to-month lease, you can opt to cancel the lease with adequate notice (typically 30 days’ notice).

It’s possible the timing will not work and you need to sell the property while tenants are living there. Below, we’ll go over what to do when your lease isn’t up yet.

What Happens When You Sell Your Property With Current Tenants?

The new owner will inherit your rental lease and continue renting to your tenants. You should review the existing lease with the new owner and transfer the security deposit to him or her.

Be sure to notify tenants of any changes:

  • The new owner’s name and contact information
  • How to pay rent moving forward
  • If the security deposit was transferred, the amount, and new location

Next Steps

If you’re inheriting a rental lease from a previous owner, make sure you understand the terms and rules of the lease. Check out our Complete Guide to Rental Leases for everything you need to know about leases.

If you’re selling your rental property, check out Redfin’s Selling Guide to learn more about the process.

 


Also published on Medium.

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