Buying A House With Tenants: A Guide
Erin Gobler7-minute read
July 05, 2022
Buying a home is a huge decision, and for many people, the most expensive purchase they’ll make in their lives. But it can also bring unexpected or unwelcome complications. At some point, you may find yourself buying a house with tenants.
For a real estate investor, buying a home with a tenant might be the ideal situation. But if you’d like to use the home as your primary residence, it might be an unwelcome inconvenience. Either way, it’s important to understand the legal implications of such a purchase and how you can protect yourself as a new landlord.
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What Happens If You Buy A House With Tenants?
Whether it’s a single-family or a multiunit home, buying a rental property with existing tenants can be complicated, although the rental income the property already generates can help you get a mortgage loan.
Remember that the property you’re buying is someone else’s home. The existing tenants maintain all of the rights granted to them in their lease, and you agree to take on all of the obligations of a landlord. Before putting yourself into this situation, be sure you fully understand the state and local laws and what you’re getting yourself into.
Tenant Rights: What It Means To You
Before buying a house with tenants, it’s important to understand exactly what rights those tenants have.
It’s also important to note that a tenant’s rights will vary considerably from one state to the next. Some states have laws that are much more favorable to landlords, while others prioritize the needs of tenants. It’s not necessarily a bad thing to buy a rental property in a state with laws that are more favorable to tenants, but you need to understand what you’re getting yourself into.
Perhaps the most important thing to be aware of are the existing lease terms. It’s likely that the current owner and tenant signed a legally binding agreement allowing the tenant to live there during certain dates, as long as they pay rent. Depending on the state you’re in and the terms of the lease, you may or may not be able to ask them to leave.
Rental leases also generally guarantee a tenant the right to live in a safe and healthy environment. Keep in mind that as the new property owner, it will be on you to maintain that.
As a landlord, you have certain responsibilities to your renters. And it’s not just the lease terms that you inherit from the previous owners. State and local laws also dictate certain obligations that you have to your tenants.
Some of the common landlord obligations include:
- Complying with all state and local landlord-tenant laws, health codes and building codes
- Maintaining a safe and habitable property for your tenants
- Maintaining the HVAC system, electrical, plumbing, etc.
- Ensuring the water heater works and that tenants have access to running water and heat
- Keeping the property free of environmental toxins such as asbestos, lead-based paint, and pests
- Maintaining the structural integrity of the building
- Responding to any repairs in a prompt manner
One legal risk you face when buying a home with tenants is that the property may not be up to current code. If the previous owner didn’t properly maintain the home, you might be liable for that lack of care when you close on the property. Depending on state and local laws and the terms of your lease, there could be legal or financial consequences.
When buying a rental property, it’s important to understand not only what your obligations are but whether the previous owner met those obligations and maintained a safe and healthy home for their tenants.
The Pros And Cons Of Buying A Property With Tenants
Pro: No Need To Find Tenants
Finding a tenant for your property can be a long and expensive process, especially in certain housing markets. When you purchase a property that already has tenants, you have the advantage of not having to find new ones yourself. Even if the current tenants leave after their lease expires, you have a bit of time to get ready after owning the home for a while.
Pro: Immediate Rental Income
With the benefit of not having to find new tenants comes the perk of having immediate rental income when you close on the home. One of the risks of owning a rental property is that if the property sits vacant, you’re on the hook for the mortgage with no rental income to cover it. When the home already has tenants, you don’t have to worry about that right away.
Pro: Property Up To Code
Rental property owners must meet legal requirements for habitability, set by state and local law. Be sure to familiarize yourself with the relevant landlord-tenant laws and property codes. You can either look them up on your own or have your real estate lawyer advise you. Make sure that the current owners have complied with all legal requirements in full, and that the building is fully up to all code provisions.
Con: Inherited Legal Risk
When you purchase the property, you’re immediately liable for anything on the property that doesn’t meet the legal requirements. Before you buy, have a thorough home inspection performed and review the previous owners’ maintenance records, documentation of prepaid rent, security deposits and ensure they’ve met all legal requirements for the property.
Remember that becoming a landlord comes with a legal responsibility to tenants, and if the previous landlord didn’t live up to that responsibility, you could end up paying the price.
Con: Lease Terms Must Be Honored
When you buy a property that has existing leases, you must continue to honor those lease terms. Depending on how the previous list was written, this could certainly be disadvantageous to a new owner. The previous owner may not have written the lease in a way that’s favorable to the owner, and it could make your time as a landlord difficult. You can’t change those terms until the current leases expire.
Con: Difficult To Remove A Tenant
It’s important to understand that a lease is a property right that attaches to the property, not the property’s owner. That means that the new homeowner is legally obligated to honor the terms of the lease.
Additionally, if you purchase the property hoping to live there, be aware that you can’t remove them for that purpose alone. You’ll have to wait until their lease ends. Be sure to comply with any applicable laws requiring notification to tenants that you won’t be renewing their lease.
Evicting a tenant can be difficult and expensive. Some states favor landlord rights while others afford tenants more protections. You might find that removing a tenant who doesn’t pay rent or abide by the lease terms can be a lengthy process.
Buying A Property With Tenants: FAQs
Before you buy an investment property, consult with a real estate attorney about the landlord-tenant laws in your state.
What is a single family home?
By legal definition, a single-family home includes multiunit homes with up to four units. That means you can buy four rental units with a residential mortgage, though you may be charged a higher interest rate if you don’t use the property as a primary residence.
Should I buy a house with tenants?
When deciding whether to purchase a home with existing tenants, remember that having rental income will mean you’ve got cash flow from the property, from the beginning. Consider your goals for the property. If your plan is to live in the home yourself, then buying a home with tenants probably isn’t ideal. You’ll have to wait until their lease ends before you can move in.
Even if you plan to keep the property as a rental, it’s still important to do your due diligence. Ask the current owner to see the lease agreements, so you know what you’re getting yourself into.
Can I evict a tenant when I buy a house?
In general, new landlords must honor the lease terms. However, there are some situations where you can evict an existing tenant. First, you can evict the tenant if they are not abiding by the terms of the lease, such as not paying their rent each month. Be aware that eviction moratoria put in place during the COVID-19 pandemic are still in place in some states, counties and cities, though the federal moratorium ended in 2021.
It’s also possible to place terms in your purchase contract requiring the current owner to terminate the lease before the close of the sale. They could rely on the terms of the lease that allow them to do so or offer them an incentive to leave. Finally, some states allow for owner move-in evictions, which allow property owners to recover possession of a home occupied by tenants if they plan to live there.
What happens if I bought a house and the tenant won’t move out?
You may run into a situation where a tenant is legally required to leave the home but won’t do so. The first step is to research and understand your state’s laws. Each state has its own regulations when it comes to landlord-tenant relationships and evictions. Know how the process works in your state to ensure you’re fully complying with state laws.
Before taking legal action, start by speaking with the tenant to see if you can reason with them. This is the simplest, cheapest and least confrontational option. However, as you try this strategy, be aware that it may not work.
Next, look through the lease agreement to ensure you have grounds to evict the tenant. Most leases give the property owner the right to terminate the lease if the tenant violates any clause within the agreement. If that’s the case, you can serve the tenant with a formal eviction notice. The notice will stipulate the number of days within which the tenant must leave the home. If the tenant leaves, the matter is resolved. If the tenant still doesn’t leave, you may need to go to court or enlist the help of your local sheriff, depending on your state’s laws.
It’s important to follow the law throughout the eviction process. Avoid confronting or harassing the tenant. Actions such as changing the locks or turning off the utilities without the court’s permission may violate state law and subject you to criminal prosecution and civil lawsuits.
The Bottom Line: Rights And Responsibilities As Soon As You Close
It’s important to understand that – as the new owner – you’ll have the right to rental income and the responsibility for meeting the current owner’s obligations pursuant to the lease as soon as you close. Whether this is a good thing depends on your long-term plans for the property.
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