Buying a house with tenants? Here's what you need to know
Buying property can be a complex undertaking at the best of times, but what if you’re buying a house or apartment with tenants living in it? How does the process work and what are your and the tenants’ rights?
The clever Latin speaker who coined the term ‘caveat emptor’ (let the buyer beware) perhaps had situations like this one in mind. When you buy a house or apartment, whether it’s one you plan to live in or an investment, generally speaking you’re taking on responsibility for most and sometimes all aspects of the property. That means the nice view, the overhanging tree, the pool, the unidentified creature lurking at the bottom of the pool, the convenient location, the council bills and just about everything else.
If the property has existing tenants with a lease, you’ll generally be taking them on too, at least until the rental agreement expires or you mutually agree to end it early.
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Depending on your plans for the property, this could be a bonus or an inconvenience. Either way, it may be helpful to know what your obligations and options are before you buy.
To help arm you with information on some of the key considerations, Canstar spoke to Kate Fuller, Senior Investment Manager at National Property Buyers, who shared some insights based on her years of experience advising buyers in situations like this.
Remember, this is general information and the exact circumstances, as well as the relevant rules and laws in your state or territory, could also influence how the process works and your obligations as the new owner. Consider speaking with a qualified professional if you need personalised advice.
How would someone find out if a property they are considering buying has existing tenants?
If the property is being marketed towards investors, an existing tenancy is often mentioned in the advertisement. The agent representing the sellers may also make prospective purchasers aware at open inspections or if the question is asked when buyers are inquiring about the property. The seller’s agent will generally be able to supply information relating to the lease, including the type of lease, regular rental amount, expiry date and any special conditions of the lease. A copy of the lease and extensions is generally also included in the vendor statement which is a document outlining certain details about the property that the buyer should be aware of before a sale is agreed.
If I buy a tenanted house, do I have to honour the existing lease?
The existing lease will generally need to be honoured. Depending on whether the lease is fixed term or periodic, this will determine what notice is to be given if you wish to gain vacant possession. There are times when the tenant may wish to vacate early and so therefore vacant possession of the property could be negotiated, however this cannot be enforced if they are in a lease.
What extra research should a buyer do before they commit?
We would suggest speaking with the agent – they often have access to the tenant history or can speak with the landlord or property manager involved to gain a better understanding of the current tenancy. If you are buying as an investor, it could be favourable to do some research into the area, the vacancy rates, median rental value and demographics. It could also be worthwhile finding out if the tenant is hoping to have their lease renewed (if expiring in the near future) as that could all be negotiated in-line with the purchase, bringing stability for the tenant and you as the buyer.
What happens to the tenant’s bond when a new buyer takes over ownership of the property?
The bond will have been lodged by the landlord or property manager with the relevant rental tenancy authority in your state or territory. If you take over a tenancy, the bond will stay in place but changes to ownership details and/or management will need to be provided to the relevant authority.
What will my immediate duties and responsibilities be once I buy a tenanted house?
After purchasing, many landlords choose to engage the services of a professional property manager. They will be able to take you through the process of managing the property from settlement, ensuring this stays smooth with minimal disruption to the tenant. If you wish to self-manage, you will need to advise whoever currently manages the property and arrange for copies of tenancy agreement, lease extensions, ingoing inspection, routine inspection, tenant ledger, manuals and keys to be collected upon settlement. You will also need to gain the contact details for the tenant and advise them on settlement of your contact details for any maintenance or ongoing queries, plus update them on details for rental payments. It could also be beneficial to take out landlord insurance to protect yourself, whether you’re self-managing or using a property manager.
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If the property has a manager in place, could I hire a different one?
You have no obligation to continue to use the same manager as the previous owner. Sometimes this can be a good option for consistency, but if you have other properties with another manager or want to do your own research and engage your preferred manager, you can do so. The management will change over when the property sale settles and you take over ownership.
Does buying a house with tenants involve any extra costs?
There shouldn’t be any extra costs involved with buying a tenanted home. The only consideration is property management fees if you choose to use one. If anything, you potentially save some money by not having to advertise and lease the home immediately (if you were buying it as an investment).
What are some of the other pros and cons of buying a property with existing tenants?
If you are looking for a property as an investment and one you find that ticks all the boxes also has existing tenants in place, assuming they are good tenants who pay their rent and look after the home, this can save some vacancy time and therefore ensure the property is generating an income straight away. One factor to be aware of is whether the rental value on the existing lease is ‘market value’. Depending on the circumstances, the property may have been leased at a lower than ideal value and you need to go through the correct process to increase it – for example, by giving adequate notice. You may also have to wait a period of time before increasing the rent if it has already been increased recently.
Another potential issue is that if the tenants aren’t fulfilling their obligations (looking after the property, paying bills and rent) you may find yourself in a situation where you need to take action to handle those issues.
On the other hand, if you are looking for a property for a purpose other than immediate investment, having a tenancy in place may be seen as an inconvenience and could delay your move in date while you wait for the existing agreement to end.
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This article was reviewed by our Digital Editor Amanda Horswill before it was updated, as part of our fact-checking process.
Sean Callery is a former Deputy Editor at Canstar. When at Canstar, he and his team covered just about every finance and lifestyle topic under the sun, from property to budgeting to the nitty-gritty of financial products like home loans, superannuation, and insurance. Sean has written and edited hundreds of finance articles for Canstar and his work has been referenced far and wide by other publications and media outlets, including Yahoo Finance and 9News.
Sean has accumulated more than a decade of international experience in communications roles – in Australia, the UK and Ireland – across finance, banking, consumer and legal affairs, and more. His work as a journalist has featured in various publications and media outlets, including the Drogheda Independent, the Law Society of Scotland Journal and Ireland’s national broadcaster, Raidió Teilifís Éireann. Before joining Canstar, Sean oversaw content at Great Southern Bank (formerly CUA), one of Australia’s biggest member-owned financial institutions. He has a Bachelor’s Degree in Journalism (Dublin City University) and a Masters Degree in Creative Advertising (Edinburgh Napier University).
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- How would someone find out if a property they are considering buying has existing tenants?
- If I buy a tenanted house, do I have to honour the existing lease?
- What extra research should a buyer do before they commit?
- What happens to the tenant’s bond when a new buyer takes over ownership of the property?
- What will my immediate duties and responsibilities be once I buy a tenanted house?
- If the property has a manager in place, could I hire a different one?
- Does buying a house with tenants involve any extra costs?
- What are some of the other pros and cons of buying a property with existing tenants?
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