Elenis M. Camargo
What you need to know when purchasing properties with inherited tenants
Many investors ask me whether purchasing a house with inherited tenants is something to avoid or if there is no difference than purchasing a vacant home. My answer is that I would not let the inherited tenant be the deciding factor on whether or not I’d acquire a property. The deciding factor should be the property itself. My first three properties came with inherited tenants. The first two properties required evicting the tenants, while the third property still has the tenants there from when I bought it in early 2019. The main risk with an inherited tenant is that you don’t know anything about them: their rental and credit history, income, background, and whether or not they are difficult to deal with. But as a long as the property fits what I am looking for it doesn’t matter to me if the house is occupied or not. When reviewing a prospective tenant’s employment, background, credit history, and rental history we are assuming they will continue living the same way. But they can start off paying consistently and then have a life crisis, as life is unpredictable, and get behind on rent. This can happen to a tenant we place ourselves. In this last year with our property management business in Jacksonville, FL we have gained over sixty properties with inherited tenants. In our opinion, these are the pros and cons of acquiring properties with inherited tenants along with tips to make the transition easier:
Instant cashflow: From the day you close you’ll instantly start cash flowing on your new rental, so long as the numbers work and the tenants pay their rent.
Potential long-term stability: If you inherit a tenant that has been there for years, like my third property that had tenants living there for twelve years, then it could be assumed that they would continue residing there, providing you consistent and long term cashflow.
Saving time and money on placing a new tenant: If you are self-managing then you would save time on placing a new tenant. If you have a property manager then you would save the placement fee, which can be equal to the first month’s rent.
Saving money on making the property rent ready: Even if you are buying a “rent ready” property, there is ALWAYS something that needs to be done to get it truly 100% rent ready. Having it professionally deep-cleaned or installing new smoke detectors are the most commons examples.
Background: You won’t know anything about your new tenant. Nothing on their background, eviction history, credit score or income situation. You can request a rent-roll to ensure that they have been paying on time and that they are paid up which is helpful information.
Lease: You’ll have to abide by the existing lease that is in place until that ends. If there is a month-to-month lease, then you have the choice of either not extending the lease or offering them a new lease at a rental rate of your choice.
No rapport: Having rapport with a tenant is very important. Tenants want to trust that you as the landlord will have their best interest when they need you. It’s also important for tenants to understand how we prefer them to submit their rent payments or submit maintenance requests through our online portal and only to call if there is an emergency. Another important item for tenants to understand are the consequences of paying late. The previous landlord may have accepted late payments or partial payments as the norm, but this would be something we would have to discuss with the tenants as unacceptable.
Unsafe living conditions: If the property is in unsafe condition then it’s a liability and the items need to be fixed right away. During our first interaction with the new tenants we often hear from the tenants of items that were not fixed by the previous owner or manager. For the ones that are unsafe we address those immediately.
Tips when getting a property with inherited tenants When acquiring a property with inherited tenants it involves an entirely separate process than acquiring a vacant home. Here are the learnings we have had over the years with dealing with inherited tenants.
Security deposit: Make sure the security deposit is transferred to you at closing. Legally that money belongs to the tenant and if the seller does not transfer that over to you, when the tenant moves out you will have a tenant asking for their deposit back that you never received.
Onboarding the tenants: It’s important that you get the tenants lease and contact information from the seller’s agent as soon as you close. Call them and introduce yourself. The majority of the time the tenant will not be aware that the property was sold so be prepared for some wariness from them. Put yourself in their shoes and work to make them feel comfortable that all has been taken care of and this transition will be smooth. They will typically ask questions about whether their lease will stay the same, their current rent amount, what happens to their security deposit, and where they can pay rent. Be ready to answer all those questions. Follow up with an email and/or letter with the same information. Sometimes inherited tenants won’t answer the phone and you won’t have an email for them. If this is the case, post a notice on their door with the same information and asking them to call you right away. Here is the letter I use for onboarding inherited tenants. I typically say something like:
“Hi, my name is ____. I’m calling from ____. I’m not sure if you’re aware, but the property you live in at 123 Main St was just sold and we are the new property managers (owners). I’m calling to introduce myself and get you transferred over to our payment system. Also, to see if there is anything in the home that needs fixed that the previous owner did not address.”
Evictions: Be comfortable with the thought of an eviction. Even if the seller provides you with a ledger you don’t know the stability of this tenant. They may suddenly stop paying or causing issues or damaging the property and it may lead to an eviction. Out of 50+ tenants that we inherited over the last year, we have had seven that ended in either an eviction or abandonment. It’s usually all for the better anyhow since the homes can be updated and listed for a higher rent with a tenant that meets our strict requirements.
I hope I have helped you understand what to expect if you acquire a property with an inherited tenant and that you are now open to this option. It could add some additional work during the sale and the initial after sale phases, but nothing too challenging. Some of the best deals we have seen lately are properties with inherited tenants at below market rents. We’ve come across a few properties when tenants were excited that the property was sold because they didn’t like their previous manager or owner. They will let you know the problems with the house and hope that you can fix it for them. Many times, you’ll end up getting an amazing inherited tenant and have no issues at all. Having a process in place for inherited tenants will make things much easier for you and give you the confidence to buy a house with a tenant. Best of luck!