Buying an investment property with a tenant already in place can be a very attractive option, who wouldn’t want to avoid the admin of finding, vetting and contracting a new tenant and earn income from their investment from day one?
Generally buying a tenanted property isn’t a problem, if the buyer bears in mind that old adage of ‘huur gaat voor koop’. Essentially common law dictates that a tenant’s lease takes precedence over change of ownership through a property sale. Therefore the new owner of the property is required to honour any existing lease agreements to the letter until such time as the lease expires and as the new owner you will need to take that into account.
Disadvantages of purchasing such property
If a tenant’s lease agreement was signed before the sale of the rental property, the agreement will survive the sale, making the new owner the landlord until the term of the lease has run its course. Many buyers may not be prepared to step in to the role of landlord, with all of its inherent responsibilities and costs, and thereafter careful consideration should be given before buying into this sort of situation. Therefore the quality and terms of the existing lease and the quality and attitude of the existing tenant plays a huge role in the viability of the property as an investment.
That’s not to say that buying a property with a tenant still in occupation is necessarily any more problematic than a normal sale. In some cases this works quite well as in instances when the lease expires on the same date as the transfer of the property goes through. However, in other cases it could mean that the new owners need to wait weeks or months before being able to take occupation.
In this case the buyers may well need to spend on accommodation for themselves and storage for their belongings, as well as taking on the responsibility for repairs at their new, tenanted home and the tenant’s deposit (minus any costs for damages). They would also be responsible for the legal costs should they need to evict the tenant. It may be wise to vet the current tenant before agreeing to the sale in order to determine whether there may be issues with non-payment, damage to the property or, if the tenant refuses to vacate the property when the lease expires.
As a prospective buyer you should make inspecting the lease agreement a top priority when assessing the potential of a tenanted property as an investment. Because once transfer has taken place, you will have to step directly into the shoes of the previous landlord, so understanding the rights and responsibilities are absolutely imperative. It’s not just rent collection that you need to think about but also the fact that you will need to do things like manage the deposit and take responsibility for any maintenance or repairs that fall within your purview as well.
Advantages of purchasing such property
Buyers have further options than carefully vetting the tenants themselves; which includes making provision in the sales agreement which stipulates that the seller is responsible for removing tenants. Added to this could be a clause that the seller pays an agreed amount of occupational rent until the tenants are eventually evicted. Though this might be a tough sell if the sellers have other willing buyers.
Another option would be to communicate with the tenants and finding out whether they are willing to leave when the lease expires, which is no guarantee that they will, but at least an indication of cooperation. The last thing you want is to inherit a deposit dispute, or having expensive repairs, so you do need to ensure that your rights in these matters are protected as far as possible in the sale contract you sign.
As with any property transaction, buyers need to do their homework and know what they’re willing to negotiate on to make the purchase. If becoming a landlord, even if only for a month, is a deal breaker, then it’s best to look for another property. However with a fair lease in place and a responsible and satisfied tenant in a tenanted property can be the ideal investment.
It will also be useful to consult an attorney if you have any doubts about buying a tenanted property and most importantly before signing an offer to purchase.
https://randles.co.za/wp-content/uploads/2018/08/buying-a-rental-income-property.jpg457700Randles/wp-content/uploads/2018/04/logo.pngRandles2018-08-27 06:51:452018-08-27 06:51:45Purchasing a let property