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Terms To Check On Leases When Buying Tenanted Property
One of the best factors of buying investment properties is when the apartment is already tenanted with a long term tenant.
The rental collected will then pay for the property itself. This means you can potentially get something worth $1m for just a $200k investment.
Not too shabby.
There a a number of issues that you will only learn through managing a tenanted property. And when you are a freshman on buying one, one of the first things that you have to do is to take a good look at the existing tenancy agreement.
If you are taking over a lease that is detrimental to you, you could be looking at sleepless nights throughout the period of the existing tenancy agreement.
So instead of buying an asset that would put cash flow into your pockets, you are buying a lemon that will leave you with a sour taste perpetually.
These are the key terms to check on tenancy agreements.
This item will definitely be first on your list.
Even if you are looking for other terms in the tenancy agreement, your eyes will mysteriously go to the rental amount that the tenant is paying.
Here are some of the questions you need to ask yourself.
How much is the rental? If there has been advanced payment of rental, how much was it? What is the period of time tenants have been paying the specified rental rates? Are the rentals charged on par with market rates? Are there any unique agreements on the security deposit?
2) Who are the tenants
Find out who are the tenants allowed in the property.
This usually include the resident tenants and their children.
It will serve you well to remind the tenants of this.
Extra people living in the apartment not only means opportunity costs, but also a higher utility bill with more wear and tear as well.
Look out for items that the current landlord has conceded to the tenant. Tenants could be paying low rental in exchange of concessions from the landlord. Find out what they are. Likewise, they could also be paying high rental in exchange to certain promises from the landlord. You are going to attend to these concessions since you are taking over the lease.
3) Utility bills
This is pretty straight forward. Sometimes landlords pay the bills and sometimes tenants pick it up. You will of course want tenants to pay their own utility bills to deter abuse unless they are paying premium rates on rental.
While there is no fast and hard rule, usually landlords settle the utility bills when they are living in the same house as well. And tenants are understandably responsible for it when they are renting the whole house.
This links back to the previous item on concessions.
The tenancy agreement should clearly state who is responsible for what.
You could run into disputes in future if these are not stated clearly.
Items to factor in include, housekeeping, laundry, rubbish disposal, club memberships, etc. Even parking charges should be thought about.
5) Furniture and fittings
What are the essential furniture and appliances that you have to provide to the tenant?
If this is stated in the tenancy agreement, find out the specifics and who is responsible for repairs and maintenance.
Sometimes relationships between landlord and tenant can become so toxic that tenants go out of their way to damage the property.
As a real estate investor, you need to protect yourself by being assertive on such issues.
6) Lease expiry
When will the existing lease expire? What is your move after the expiry? Does the tenant have an option to renew at a particular rate? What do you foresee for the market by the the tenancy agreement expires?
7) Security deposit
Note that the security deposit is not a prepayment of rental. Find out the amount that has been paid.
The current owner has to transfer ownership of the funds to you.
There might be a inspection checklist that the landlord and tenants signed before the latter moved in.
If there is indeed a checklist, dig it out and cross check the items on the list with the physical item.
8) Unwritten terms
The landlord may have made promises by word to the tenant.
Learn what they are and see if you will be able to fulfill them.
You don’t want an argument in future about this when the landlord has already passed everything over to you.
As an honorable property investor, you have to honor existing leasing agreements.
This is the first step to keeping the tenant with you after the current lease.
It will make them comfortable enough to accept your own terms in future when renewing the tenancy agreement.