What to know when buying tenanted property

When you buy a property, you expect to get just that – a property that you can do whatever you want with.

But some properties come with a little extra in the form of tenants who entered into a lease agreement with the previous owner of the property. While your ideal situation may involve either you are moving in yourself or sourcing renters using your own criteria (and perhaps for a higher rent than the current tenants are paying), there may be advantages to buying a property as a package deal with tenants.

Buying time for big decisions

Regardless of whether you’re buying a property to live in or buying an investment property, opting for a property that comes with existing tenants can provide advantages. You have a guaranteed income from the moment the property becomes yours. That means there is no need to spend time and money finding someone to pay rent if you intend it as a rental property, and you can also have some additional income to put towards renovations – or even a knock-down rebuild – if you want to move in or rent it out for a higher price down the line.

Of course, some tenants may not be so beneficial to your property. They may be inconsistent with their rental payments, or they may be paying rent that is below market value. You must then decide whether to accept them or investigate whether there is a way to replace them.

Know the rules

As a buyer, you are entitled to know whether a property is tenanted, and all the details of the lease agreement before you agree to buy. There should be no surprises. The easiest way to find this out is by checking the vendor’s statement.

If there is a lease in place, you need to find out which type it is. Leases can be periodic (no set end date), fixed term or a month-by-month basis. For periodic and month-to-month leases, how soon you can gain access to the property will depend on which state or territory it is in. This can range from 42 days, to two months, to 90 days.

A fixed term lease is a little trickier. You cannot break the terms of the agreement and will have to see the lease through to its conclusion. Fixed term leases tend to be either three-month, six month or one year in length, so just be aware of how long you will have to wait for the lease to run out.

There are exceptions to these timeframes. These may occur if tenants have fallen behind in paying rent, caused significant damage or used the property for illegal activity. You could have good reason to apply to a civil and administrative tribunal and ask for earlier access.

On a more positive note, there can sometimes be wiggle room for negotiations between tenant and landlords if they know you are desperate to move in. Keep the lines of communication open. Perhaps paying for some of the moving costs could help you bargain for tenants to leave earlier?

Planning rent increases

If you want to maximise the return on your investment by increasing the rent, you can do so reasonably quickly. At least sixty days’ notice is required in most states and territories.

It’s a good idea to take a long-term view when deciding by how much to increase rent. Landlords may only increase rent once every 12 months in most jurisdictions. You may want to consider what the market rate is for rent. Perhaps also think about how your tenant may respond. If you suspect their income is modest, could an increase prompt them to leave? If they are a model tenant who always pays on time, might a slight rent increase rather than a substantial one give you a better chance of retaining them?

You are also within your rights as the landlord to change property managers or manage it yourself. However, you must inform the tenant of these changes and update the details on the lease agreement.

This information is of a general nature and does not comprise professional advice or product recommendations. Before making any decision about any investments, financial products and services, you should consult with your own independent legal, taxation and financial advisors, who can provide advice which takes into account your own personal circumstances, goals and objectives.