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Buying a tenanted property – what you need to know

Tuesday, 5th Sep 2017

At first thought, buying a tenanted property may appear to be an advantage. However, acquiring an investment property that’s already tenanted can pose a number of problems. So what do investors need to be aware of?

There are a number of benefits to having tenants in place. Firstly, you’ll likely save money from having to pay letting fees if you use a professional property manager. You’ll also save on advertising costs associated with finding a tenant.

If you decide to manage the property yourself (which we advise clients against) you’ll save yourself time – no need to vet applications and choose a tenant.

One of the biggest advantages though is that you’ll start to receive rental income immediately, as your property won’t be sitting vacant. This is helpful when you’ve first acquired a property, as cash flow can be constricted with additional associated costs such as insurances and rates.

However, while these aspects are beneficial, there are also a number of potential drawbacks that investors need to consider.

  1. Are they good tenants?

    It’s important to ask the selling agent or property manager about the tenant’s history:

    • Who is living in the house?
    • What do they do for work?
    • Do they have a good track record of paying the rent on time?
    • Do they take care of the property?

    If the tenants are sub-standard, they may consistently miss rental repayments and may fail to maintain the property, or worse, they could trash it.

  2. What’s in the lease agreement?

    The terms of the lease agreement may be highly favourable to the tenants, so it’s important you know:

    • The amount of bond held
    • How much the tenant pays in rent each week (it may be under-priced)
    • How often inspections are scheduled
    • The length of the lease

    Review the lease agreement to ensure there are no surprises after you’ve bought the property.

  3. Are there likely to be any immediate maintenance requests?

    With a new owner, the tenant may see an opportunity to lodge their list of maintenance requests, leading to unexpected costs for you. Speak to the selling agent or the property manager to determine if there are any pending or potential maintenance requests in the near term.

  4. What are your intentions with the property?

    If you’re planning to develop the property, or want to undertake renovations, you may have to wait for the existing lease agreement to expire. This could cause complications with your plans, particularly if the tenant is on a long-term lease.

Before you buy your next investment property, ensure you review all relevant documentation, including existing lease agreements, thoroughly.

This will help ensure risks are mitigated and give you a comprehensive understanding of the associated contracts, and how these might impact your investment strategy.