How buying a house with tenants works

There’s a lot to think about when buying a home. That’s especially true when you’re considering the purchase of a rental property as an investor/landlord and existing tenants already occupy one or more of the units.

The good news is that owning a one- to four-unit property as opposed to a single-family home offers several benefits, including the ability to generate income every month. And if the dwelling already has one or more reliable tenants, you have the peace of mind knowing that you won’t have to look for renters.

But buying a house with renters in occupancy can be tricky. It’s natural to have questions about this process. What are your obligations as a landlord when buying a home with tenants? What legal protections do the existing tenants have? What if you want that tenant house to be your primary residence? When are you allowed to evict a renter? Trust in this article to provide helpful answers to these and other questions.

What to expect when buying a house with tenants

Planning to get a mortgage to buy a home currently being occupied by a renter? It’s important to know that existing tenants maintain all the rights granted to them in their current lease. Also, you’ll be taking on all of the legal responsibilities of being a landlord. But by doing your homework and knowing state and local laws, you can rest assured you’ll better understand the benefits, risks, and obligations that come with owning a rental property.

“Financing a tenant-occupied property is trickier than most buyers expect,” says personal finance expert and landlord Andrew Lokenauth, who notes that local laws can also impact the home buying process. “Lenders want to know the lease terms, the rent amounts, and whether those tenants are current on payments. If a lease has only a couple of months left, a lender may not count that rental income at all. I’ve seen deals fall apart in October simply because the leases expired in December and the lender couldn’t justify the numbers.”

Ryan Zomorodi, co-founder of Real Estate Skills, agrees.

“The first thing lenders will do is pull every existing lease and scrutinize it. If rents are below market, that hurts your debt-service coverage ratio,” he says. “If there’s any history of late payments, that’s a red flag. And if you were counting on owner-occupied financing, existing tenants could disqualify you from certain loan programs entirely.”

What are tenants’ rights?

Tenants’ rights vary from state to state. Some laws are more favorable to landlords, while others give tenants greater priority. The best course of action is to review the existing lease and understand its terms with a real estate attorney. Lease agreements are legally binding documents that explain a tenant’s rights and responsibilities.

According to Elizabeth A. Whitman, a real estate attorney in Potomac, Maryland, “tenants are entitled to the rights they have under their lease and under any state and local landlord-tenant laws. So long as a tenant under a long-term lease complies with the lease terms, generally, they cannot be evicted until the lease expires. Even upon lease expiration, eviction protection laws may protect the tenant from eviction except for just cause – such as nonpayment of rent or breach of the lease. Rent control laws also may protect tenants by limiting how much the new owner can increase the rent.”

If the tenant is on a long-term lease, the new landlord must comply with the rent and lease terms until that lease expires. If, instead, the tenant is on a month-to-month lease, the landlord can change the rent or lease terms with notice – usually 1 month or 30 days ahead of time.

“Likewise, the tenant isn’t required to continue their lease and can move out, leaving the landlord with vacant property and leasing expenses,” Whitman says.

Put another way, if you buy the property, the tenant may not be required to leave if you ask them to, depending on the lease’s fine print and local or state laws. Matters get a bit more complicated if you’re determined to evict, which we’ll cover later.

What are common landlord obligations?

Becoming a landlord comes with certain duties and responsibilities that extend beyond what’s indicated in the lease paperwork. Landlords must:

• Follow all state and local rental laws and safety codes.
• Keep the property safe and livable for tenants.
• Ensure upkeep and operation of HVAC, electrical, and plumbing systems.
• Make sure the water heater works and tenants have running water and heat.
• Keep the property free from hazards such as asbestos, lead paint, and pests.
• Maintain the building’s structure.
• Handle repairs quickly.

Your obligations don’t stop there, though. Before purchasing the property, you’ll need to ensure that the last landlord fulfilled their legal duties. Case in point: The property you inherit may not be up to current code and might require safety modifications. The structure may need significant updates after closing. Addressing any issues can help you avoid liability or a lawsuit from tenants affected by a previous landlord.

Financing options when buying a house with tenants

Lenders treat rentals completely differently from primary residences, regarding them instead as investment properties. That typically means underwriting will be stricter, requiring a higher down payment, and you could pay slightly higher interest rates for financing than you would get on a primary residence.

To use rental income at all, lenders typically want a current signed lease and, in many cases, proof that rent has actually been collected. Some will require a full 12 to 24 months of landlord history on your tax returns before they will count a single dollar of that income.

“When it comes to rental income, most lenders will only credit you 75% of gross rents to account for vacancies and expenses,” says Zomorodi. “If you don’t have a signed lease for a unit, they may not count that income at all.”

Common financing options when you want to purchase a rental property with tenants involved include:

• Conventional loans: These are standard mortgage loans not insured by the government that provide competitive rates for borrowers with strong credit and a down payment of at least 20%. To be eligible, you generally need a credit score of 620 or higher, a low debt-to-income ratio, and proof of steady income and cash reserves.
• FHA (Federal Housing Administration) loans:¹ This form of government-backed financing allows for a lower down payment (as little as 3.5%) if you intend to live in one of the units while renting out the others. To qualify, the property must have one to four units, you must live in one unit as your primary residence for a minimum of one year, and you must have a credit score of at least 580.
• VA (Veterans Affairs) loans:² If you’re an active-duty service member, veteran, or surviving spouse, you could qualify for this government loan and purchase a multiunit property for as little as zero down, so long as you occupy one of the units. But you must have a valid Certificate of Eligibility (COE) and meet the lender's rules for credit and residual earnings.
• Debt service coverage ratio (DSCR) loans: These are ideal for investors because they qualify you based on the property’s rental income instead of your personal employment history. However, the property's projected or existing rental income has to meet or surpass the monthly mortgage payment (typically a ratio of 1.0 or higher).
• Portfolio loans: These are loans capped by a bank or lender on its own books versus selling them on the secondary market, which provides more flexibility when it comes to terms and tenant-related quirks. Eligibility requires having an established relationship with a local or community bank and a solid business plan for the property.

Pros and cons of purchasing a house with tenants

Let’s take a closer look at the benefits and drawbacks of buying a rental property with existing renters.

Pros

There are several advantages to purchasing a property that you intend to rent out to tenants in place. Among the biggest pluses, doing so provides guaranteed cash flow and a proven income history while eliminating the initial expenses and effort needed to market, renovate, and fill a vacant unit.

No need to find occupants

It can be challenging to find a reliable renter, but if the property already has tenants, you’ll save a lot of time, effort, expense, and worry. Even if their current lease is due to expire soon and the tenant plans to depart, you’ll hopefully have some time to prep and market the unit for new candidates.

“Finding a good tenant takes time and requires that the owner pay to market the property, screen tenants, and pay a real estate brokerage commission – expenses a new owner might not be able to afford,” says Whitman.

Immediate rental income

Buying a home with existing tenants comes with another major perk: rental income you won’t have to wait for. After all, if you are financing this transaction, you don’t want the property to sit vacant while you make mortgage payments.

“The biggest plus is immediate cash flow – you’ll start collecting rent from day one,” says Lokenauth. "Recently, I bought my place with tenants already in it, and my first rent check came in before I even made my first mortgage payment.”

Property is likely up to code

Being “up to code” means a property conforms with minimum safety and construction standards stipulated by local government ordinances. Still, it's still important to have a home inspection because code compliance doesn’t account for wear, age, or the overall functionality of things like your HVAC system, roof, or other components. It’s a smart idea to hire a real estate attorney, who can help you navigate potential issues and safeguard your interests against liability. Your attorney can, for instance, review the inspection report for legal red flags and draft particular contingencies that shift the responsibility for needed repairs or code violations to the seller.

Cons

Then again, there are several disadvantages to this strategy. A big one is that landlords must face the financial vulnerability of unexpected capital expenditures, which can happen if, for example, a roof or furnace needs to be replaced shortly after closing without an immediate vacancy window to perform the necessary repairs. Here’s a breakdown of other risks and drawbacks:

Lease terms must be honored

Honoring an existing lease can be challenging for new landlords, as the inability to change rates can hurt your budget and cash flow.

“The new owner won’t be able to increase rents or change other lease terms until the lease expires. Rent control laws may also limit how much the landlord can raise rent,” Whitman says.

Difficult to remove a tenant

Let’s say you want to live in one of the units already occupied by a renter, or you seek to significantly upgrade one or more of your units, or you have a renter violating their lease. The process for removing a tenant can get costly and complicated due to legal expenses, lost rental income, and possible repair expenses if the property has been damaged. 

“If the tenant doesn’t reliably pay rent or maintain the property, the owner must deal with those issues and may incur the expense and hassle of an eviction,” says Whitman. “Laws may also restrict the landlord’s ability to evict an undesired tenant.”

Puts renovation plans on hold

Smart renovations are important in competitive markets if you want to maximize a rental property’s appraised value and charge steeper rental rates that will protect your investment and ensure it remains profitable to counter increasing acquisition costs. But current tenants can make property improvements difficult because they have a legal right to physical presence in the unit and quiet enjoyment, which can make it difficult to perform big cosmetic or structural renovations that demand the space to be empty. That means you may need to postpone capital improvements and upgrades or opt for smaller repairs until the current lease term ends.

Should I buy a house with tenants?

It’s important to know how to make the best decision on whether this purchase makes sense. To help, it's constructive to ask yourself key questions, such as:

• Do I plan on occupying the home or living on-site?
• What kind of financing do I plan on getting?
• What rights do landlords have?
• Is the property up to code?
• Will I manage the property myself or hire a property manager?
• Are the tenants current on rent?
• How long are the remaining leases?

What do those leases actually say about things like maintenance, pets, and early termination?

“I’d say do it if the tenants have a solid payment history, the rent is at market rate, and the lease terms are favorable. A property I bought in Phoenix with great tenants already in place has been my best investment,” says Lokenauth. “But I would pass if the rent is way below market rate, the tenants have a history of late payments, or the lease terms are unfavorable. Also, consider the length of the remaining lease – shorter remaining terms give you more flexibility.”

Ask Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College, and he’ll tell you that committing to a rental property with existing lessees can be a wise investment.

“But that’s true only if you do your proper due diligence, review the lease terms carefully, and are comfortable with possibly limited flexibility regarding property management,” he says.

Can I evict a tenant when I buy a house?

To put it simply: “Unless the lease allows it, a new landlord usually may not evict an existing tenant who isn’t in breach of their lease simply because property changed owners,” says Whitman.

One proactive strategy is to place terms in your purchase contract that require the current owner to terminate the lease before the sale closes. Some states also permit owner move-in evictions. This allows landlords to recover possession of a home occupied by tenants if they plan to live there.

However, if renters can’t or refuse to cooperate with a new landlord, experts recommend working with the renter first before taking legal action. It can be costly and time-consuming to evict a tenant and find a new one. But if they won’t listen, abide by requests, or move out when required, you can legally pursue eviction.

“A landlord’s only option here is to file an eviction action. In most states, the eviction process takes several months and can be costly,” Whitman continues. “It is illegal for a landlord to use ‘self-help’ to remove a noncompliant tenant by changing locks or moving the tenant’s belongings out of the house.”

Lokenauth says he’s “been there, and it’s a pain.” The formal eviction process involves a court filing, waiting for a hearing date, and ideally hiring a lawyer. “In my case, it took about 3 months and cost me around $3,000 in legal fees. If you win, the sheriff’s department handles the actual removal.”

FAQ

Still uncertain about how to proceed? Here are some answers to common follow-up questions prospective landlord investors have.

How does a mortgage work with tenants in common?

Tenants in common is a form of co-ownership where two or more people own shares of the same property, and the shares don’t have to be equal. Each owner can sell or transfer their share, and if one owner passes away, their share goes to their heirs rather than automatically to the other owners. This is different from joint tenancies, where ownership passes directly to the surviving owner. From a mortgage standpoint, all parties on the loan are still fully responsible for the debt, regardless of how ownership is split. If one owner holds a 30% share but is on the mortgage, they are still 100% liable for the full payment.

What happens to security deposits after the sale?

Security deposits legally belong to the tenants, not the landlord. When a property sells, those deposits need to be transferred to you as the new owner, or the seller needs to return them directly to tenants. This is something that gets negotiated during the closing process, and it is critical to get it in writing. In most states, if the seller keeps the deposits and doesn’t transfer them, you could still be held liable to the tenant when they move out. The law typically treats whoever is the current landlord as responsible, regardless of what happened at closing. Always confirm in the purchase agreement exactly how security deposits will be handled, and ensure the amounts match the lease agreements.

Can I move into a house that has tenants?

Yes, you can, but not necessarily right away. If there’s an active lease, you generally have to honor it until it expires. Depending on the state, you may be able to give notice that you intend to occupy the property, or one of the units if it’s a multifamily property, as your primary residence, although most states require 60 – 90 days of notice at a minimum. Some states have even stronger tenant protections that make this harder, especially if the tenant has lived there for several years. It’s best to discuss this with a real estate attorney in the state where the property is located, as rules can vary widely.

Can tenants refuse showings or inspections during a sale?

Tenants have rights, and one of those rights is “quiet enjoyment” of the property. This means their rented property can’t be shown at any time with no notice. Most states require 24 – 48 hours of written notice before a landlord or their agent can enter the rented property. Buyers and sellers should schedule showings, open houses, inspections, appraisals, and contractor visits according to the lease and applicable laws and rules.

Does buying with tenants affect homeowners’ insurance?

Yes. Standard homeowners insurance is designed for owner-occupied properties. If you purchase a home where existing tenants are living, you likely need a landlord insurance policy, also called a dwelling policy. Landlord insurance typically costs around 15% – 25% more than a standard homeowners policy, and it covers things like lost rental income if the property becomes uninhabitable due to a covered loss. It does not cover the tenant’s personal belongings, which is why it’s smart to require your tenants to purchase their own renters insurance as part of the lease.

The bottom line: Do your research before buying a house with tenants

As the new owner of a rental property, you’re entitled to a steady stream of rental income from your tenants. But you’ll also need to respect their rights, honor the language found in the lease, and ensure the property is compliant, livable, and safe. It’s best to enter this process with both eyes wide open and under the guidance of a real estate agent and attorney you can trust.

Found a property with tenants and you’d like to buy it? Make sure you have your financing in order so you can put your best foot forward. Turn to Rocket Mortgage and Redfin for help.

¹To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

Rocket Mortgage is not acting on behalf of FHA or HUD

²Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.