by Theresa Bradley-Banta
When you invest in a rental property, you’ll probably inherit the tenants at that property. They’ll become your tenants, at least for a while.
It helps to be prepared.
Here are five crucial questions to ask:
1. Are the “inmates running the asylum?”
If the current property managers are not enforcing lease terms, policies and procedures, expect real challenges to implementing new rules—even if you are the new sheriff in town.
2. Will property improvements equal new tenants?
The new tenant profile you are banking on might not exist in your market. Submarket research is critical to your success.
Who exactly are the renters and potential renters in your small submarket? If you don’t know, find out. Talk to the people who work in that specific submarket, namely: real estate brokers; local police; local merchants; property managers; and experienced, successful residential real estate investors.
3. Will I inherit collection and delinquency problems?
It’s not unusual for a seller to “stuff’ a property with unqualified renters prior to selling the property in order to reach a high occupancy level. Do the existing residents meet your tenant screening guidelines? And are they current on security/damage deposits, rent and fee payments?
4. What are the lease renewal dates for each tenant in the property?
Unless you’re investing in an asset class such as student housing where it’s common for leases to renew at the same time, look for staggered lease renewal dates for the tenants in your new property.
Think about what will happen to your bottom line if some, most, or even all, of your residents move out at the same time.
5. What about concessions, side agreements and hidden deals?
In tougher rental markets leasing agents will frequently offer special deals in order to attract new tenants.
These tenant concessions can include items like:
- waived damage deposits;
- waived application fees;
- waived pet fees and damage deposits;
- monthly rent discounts; or
- agreements such as free rent for the last month of tenancy.
Note: These concessions and agreements aren’t always in writing.
The bottom line
Don’t guess. Don’t make assumptions about the current residents.
Do your homework. Ask for copies of current and trailing (past months) rent rolls early in your property analysis.
Obtain copies of tenant files before you close. The requested tenant documents should include: applications; leases; written agreements; records of oral agreements; credit check and other screening information; deposit receipts; and more.
Want to learn more about how to take over a property with tenants? Follow the link or read these related articles: