We take a closer look at the what you need to know and the advantages and disadvantages of buying a rental property with a tenant in situ.
Selling a property with a tenant in situ is not that unusual. These properties tend to appeal to more experienced landlords. There are several distinct advantages to the arrangement when it comes to buying a property with tenants in situ.
This guide explores the advantages and disadvantages, so read on if you like the idea of buying an investment property that offers you an income from day one.
A tenant in situ, also known as a sitting tenant is a tenant that is already renting a property when you purchase it and the tenant will be staying on for a period.
In some cases, a landlord will sell their property with a tenant in situ because they have a good relationship with their tenant. However, more common is they wish to sell the property and there is still a period left on the current tenancy agreement meaning the tenant cannot be removed.
Financing when purchasing a tenant in situ can be harder, and so landlords selling with a sitting tenant may have to take a below-market valuation.
Some of the pros and cons to buying property while the tenant is still in situ include:
When purchasing a property with a tenant in situ there are a few more things to consider than purchasing a vacant property. You’ll likely want to use an experienced conveyancing solicitor for this type of transaction.
A few key things to check and verify before you purchase the property include:
As always ensure you do your due diligence when investigating a potential property purchase and verify there are no verbal agreements in place between the current landlord and the tenant that may complicate matters.
The right property can be profitable. With a tenant in situ, the property is likely to be marketed at a slightly lower price reflecting the increased assumed risk. This could mean a better yield for the investor (though not if there are issues with the property or tenant that must be sorted out first). You will want to do the mths first to ensure an acceptable rental yield for your long-term financial plan.
It’s a good idea to review potential large upcoming expenses such as old boilers or serious maintenance work and to include these costs in your calculations.
Essentially, while yes, it can be profitable to purchase with a tenant in situ you will want to make sure your return on investment is sufficient to outweigh the extra risk of buying a tenanted property.
Always view a property in person before purchasing it – this includes the scenarios where there is a sitting tenant.
A first viewing gives you a good idea of the size of the property and its general condition. A second viewing lets you look beyond the superficial to see whether there are any problems you need to know about, such as rising damp, dodgy electrics, or pests.
Make sure the property is safe and meets all legislative requirements from a health & safety perspective. Pay attention to any maintenance issues, as these will become your problem once the purchase has been completed. These are all important things to consider when buying a property with existing tenants
As usual, tenants must be given proper and adequate notice before any viewing of the property can take place. This means at least a 24 hour notice delivered in writing. Some tenancies may also not allow viewings to take place without the tenant’s permission. To ensure this is handled effectively and legally you will need to liaise with the seller.
If the tenant refuses access you will want to determine exactly why as this could be an indicator of issues in the future.
When asking to view the property be open and honest with the tenant – if you need to organise a survey then they will likely understand. You have to do your due diligence, but the tenants still have their right to privacy. Ultimately, you don’t want to upset a tenant in situ before you even take over the tenancy as it will make life harder if you do decide to complete the purchase and take over the management of the rental.
Before closing on the rental property it’s a good idea to talk with the current tenant. An informal chat is a good opportunity to introduce yourself, find out more about them, make an initial assessment of the kind of tenant you think they’ll be, and find out their future plans.
A few things to discuss include:
When buying a property with a tenant in situ it is normal for either the conveyance solicitor or yourself to conduct reference checks on the existing tenant. This will include the usual checks such as credit checks, employment checks, landlord references, etc.
Additionally, check with the current owner of the property if they have served any notices or made any of their rent payments late. This should highlight any disagreements or unresolved maintenance issues.
The existing tenancy agreement is still valid after the property handover. As such, the seller’s letting agent should provide a copy of the lease document as well as share important details including, when the document was created and the status and location of the deposit.
Verify that everyone living on the property is on the lease document and double-check for any break clauses in the lease agreement as you may need to invoke one should the tenancy not work out.
Once you have completed the handover, make sure to reach out to the tenants and reassure them and make sure they have all the necessary details such as how to pay rent, how to report maintenance issues etc.
Reassure them that the deposit is safe and that it will be returned as usual (assuming no damage) at the end of the tenancy.
If you have any renovation plans or plan to make changes to the property in some way let them know now.
It is important to understand the tenant’s rights and ensure you understand all of the risks and steps associated with buying a property with a tenant in situ.
For example, tenants in situ are protected under the Rent Act 1977. If it can be proved they moved into the property before 27 February 1997, ‘no-fault’ Section 21 notices cannot be used to evict the tenant.
Additionally, you don’t get to choose your tenant, and you have no say over the tenancy agreement that was signed at the beginning of the tenancy and so there is inherent risk there too.
However, as already mentioned you may be able to get a property at a significant discount, and if you can secure the financing required this could help you achieve top returns for your investment.