Probably you want to buy an investment property that has existing tenants inside. On a positive side, this means immediate cash flow to you, without the stress of locating and screening new renters. On the negative side, the property may have several renters who may have failed to pay rent for several months and the seller is looking for a way out. As a potential buyer, the first important thing is to use the services of a conveyancer when buying a building with existing occupants. Here are some important tips which your conveyancer will help you do to avoid the stress and hassles associated with purchasing a tenanted property.
Ask for the lease
You should understand that the existing occupants have rights. As a new owner of the property, you cannot amend or change the existing lease without consent from the tenants. This means you cannot suddenly throw a tenant out 5 months into a 2 year lease. Additionally, you cannot raise their rental fee. Furthermore, you are expected to honor whatever other provisions or agreements existing in the lease. Essentially, the lease remains in effect and a change in ownership doesn't void it. In that case, ask for the lease from the seller and read the terms and conditions with the help of your conveyancing solicitor before agreeing to the sale.
Evaluate the property's income
Next, ask for financial statements from the seller to review the income and expense statement of the property for the last two years. This assessment will give you a clearer picture of what is going on and whether the property is a good investment.
Consider using an estoppel agreement
One of the risk factors when buying an investment property with existing occupants is the tenants. Some tenants are prompt in paying rent while others delay. So, how can you lower your exposure to this form of tenant risk? An estoppel agreement is the answer. This is a precise legal form that outlines lease terms. It reiterates the terms of the lease presently in effect, and describes:
- Names of occupants in the building
- Lease term with start and expiration dates
- Rental fee amount and due date
- Security deposit amount
- Who sorts out utilities
- Whether there are any repairs or problems required
- Special agreements with the landlord
Once all the tenants have filled out the estoppel certificate, the seller and the tenants should append their signatures on the agreement before you can buy the property. What that means to you is that you get your future occupants to spell things out early in advance before you buy by filling out the estoppel form agreement, hence stopping them from claiming contrasting circumstances in future.