HMW #105: 3 Benefits of Inheriting Tenants

Read Time: 6.25 minutes

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Should you buy a property that has tenants in place? Unequivocally yes!

Inheriting tenants and the lease in place is actually my preferred way to buy investment properties and I'm about to break down why you'll find it preferable as well. 

And it's not because I like meeting strangers in new places. If that's your goal, there are plenty of apps for that that are much much cheaper than buying a house.

Actually, there is a lot of money to be made in these turn-key properties and it may not be the reasons you exactly suspect.

Ok, I will, but I'm no need for the sarcasm.  That's my lane.

Many new investors want to avoid inheriting a lease and tenants in a property because:

They didn't personally screen the tenant.

Other reasons you may give me for wanting to buy vacant properties include:

• You want to renovate.
• You want to start fresh.
• You want to write your own lease.
• You want to avoid any oral arrangements in place.

Those are natural responses, I suppose. But let's get to debunking those thoughts so you can get to making more money in real estate.

Hey now, my parents are boomers! But I do have 23 years of investing experience and have been mansplaining for about 20 of those, so this sorta fits nicely in my lane too.

Reason 1: You don't have to predict the future

This is why it's not that scary to buy a property with tenants: you can actually better screen the tenants if they are already in place.

I would rather have a tenant paying rent on time and in full each month than a tenant that looks like they have the ability to pay rent on time and in full.

With an inherited tenant you can request rent receipts for their entire tenancy before you close on a property. This is 100 times better than screening a tenant yourself as it's sizing up a tenant on their past actions and not on their future behavior.  Hindsight is 20/20 right?

If during your due diligence you find a tenants actually does have a bad rental history, then you can:

• Terminate the contract and no harm done
• Request to have that unit delivered vacant prior to close
• Request an adjustment on price based on the actual rents collected
• Request the seller to be responsible on catching up the tenant's rent collections

The good news is that most sellers with tenants will list their property when one of two things are happening:

• When everything is going grand tenant-wise and property-wise
• When nothing is going great tenant-wise and property-wise

Rarely do I see a mix of good and some bad. Your price and due diligence finding will always be reflective of what boat the seller is currently in, and anything you uncover gives you the opportunity to negotiate around the bad stuff.

Lady?! Ok, I'm going to assume that's not an insult and that you are just saying that because women are smarter than men. (And I'm just saying that so I don't get canceled.) But I'll take it that are recognizing I'm dropping knowledge bombs and that my amigo, is progress!

Reason 2: You know for sure you don't need to renovate.

I know you just to get your grubby hands on a property and fix it up. That's the fun part! That's what you see on HGTV! You get to pick tile, and colors, and give it new life!

But guess, what? You don't need to spend that money if there is a tenant already there. The current homeowner has found a tenant willing to pay market rent in it's current condition. That's all the validation you need that it's acceptable to the current tenant base who has that rental budget.

Not all rentals need renovation. Don't be a new investor that does the following:

• Buy a vacant property and spend 3 months renovating it to their personal taste
• Then advertise it for rent for too high a price while also missing the summer rental frenzy
• Wonder why real estate investing is so hard and kick yourself for not listening to that mansplainer

Vacancy is a cash-flow killer and nothing is better than having no vacancy starting at the closing table.  When you buy a property with a lease in place, both the lease and tenants convey with the property and you have to honor it.  Use this to your advantage and get to the closing table where you get paid starting day 1.  If you do this then that at closing you'll also get:

• All collected security deposits transferred to you
• The pro-rated rents for that month collected so far

If you close towards the beginning of the month you have a big credit on your closing statement for that month's rent which means you have to bring fewer dollars to the closing table.  That's always a win, right?

You and me both. Wait, we are bonding now? We are, aren't we? 

Good, because there is more:

Reason 3: You can still do it your way in the future. 

If you want to renovate, if you want to screen tenants, if you want to get your grubby hands on things - you can still do that when the lease expires. You are under no obligations to extend the lease in place. It's a contract that has an end date that states when things end.

If you want to do it your way, against my wishes, then so be it. Getting a property with tenants in place does not take this things away from you. If anything it gives you more information on what you actually do need to renovate based on real-time feedback from someone living in the home. 

There is no better feedback than the present occupant telling you the pros and cons of the property. This will also be better than an investor guessing what the property needs. And guessing on things is not how we teach real estate investing around here.

So there you go, you can do it your way, but only after you do it my way first.

Have I gotten you onboard now that inheriting tenants are a pretty sweet deal for investors?

Well, I never called you dumb. But I'm not going to correct you. 

I believe you can take what you learned today and apply it for great success.

And the best part?  Come the first of the month you get to take money from these new strangers in your new place. Back in my day, they called this mailbox money. Iykyk.

Summary

• You know it's rentable now
• You have real time feedback
• History is the best predictor of success
• You can do it your way later if you must