Updated August 2021
Buying new investment properties offers fantastic opportunities for your rental business, but it’s not always possible to buy vacant properties. Sometimes properties come with rental contracts already in place, and that means it is time for you to learn how to handle inherited tenants.
Inheriting tenants doesn’t need to be a difficult process, but it will quickly get out of hand if you don’t take the appropriate steps to formalize your rental arrangement. Contracts that don’t suit your rental business model or off-the-table agreements between tenants and their former landlord can cause you a lot of grief.
To ensure that you don’t end up in a tough situation, take some time today to learn all about handling inherited tenants the right way.
Table Of Contents: How To Handle Inherited Tenants
Ready to learn how to handle inherited tenants correctly? With the right base knowledge, turning inherited tenants into successful, long-term renters who improve your bottom line is possible. Here’s where you can get started:
- Inherited Tenants: How It Happens
- Gathering Info On Inherited Tenants
- Expert Tips: Inheriting Tenants
- FAQs: Inheriting Tenants
Inherited Tenants: How It Happens
When real estate investors purchase rental property, it often comes with current tenants already in place. These tenants are known as inherited tenants.
Sometimes the transition is smooth, and the new landlord inherits organized files on the current tenants. However, there are times when new landlords get little to no information on the inherited tenants.
This video explains more about what new real estate investors and landlords can do with new property as well as new tenants in place:
Gathering Info On Inherited Tenants
If there is no information passed along on the current tenants in a newly purchased property, the landlord needs to start gathering some. Without essential information, you could easily end up in a situation without a clear lease arrangement and unsure how to handle your inherited tenants.
You need to have a clear set of tenant–landlord guidelines for both you and the tenant to see, and that can only be formalized through a lease agreement or other written contract. Without this type of contract, you and your tenant may not be able to see eye-to-eye on specific issues.
Getting this information in line as soon as possible is an essential part of the transition process when buying an occupied property.
Step 1: Start Before You Buy
Before you purchase an occupied property or even make an offer on one, it is best to ask for information about the existing leases and any additional arrangements between the landlord and the tenant. Purchasing a property sets you up to take over the lease as-is, which means that you need to be familiar with exactly what you will be signing up for.
Many things could be tricky if you aren’t paying attention and reviewing actual documentation. Some sellers, for example, will say that a property could make up to $1,000 a month, but it is currently being rented for only $750. If you don’t review the lease agreement, you might mistakenly assume the current rent was higher.
Purchasing a property without any information about the tenants or the lease agreement means you could be walking into a situation that is a losing battle. No landlord should do this if it is avoidable. If, for some reason, you need to purchase an investment property quickly and are not able to slow down to do this research, make sure you are prepared for the entailed risk.
Beyond just reviewing the documentation yourself, it is also essential that you look into getting an estoppel agreement to ensure things are as the seller presents them.
Step 2: Get An Estoppel Agreement
Though most people want to assume the best in others, it is possible that the seller and current landlord of an occupied property could lie about what is in the lease. The documents they give you may say one thing while the tenant has said something else.
One way that you can verify what is actually in the lease is to do an estoppel agreement before purchasing a property. This agreement gives current tenants a chance to disclose the terms of their lease as they know it so that you have a chance to find discrepancies before committing to a purchase.
Any discrepancies that arise should be sorted out before closing. Differences can be as simple as honest confusion, or they might be something more complex like a fake or forged lease. Regardless, you want to have things straight before you are tied to the property.
Most sellers will have no problem with this type of agreement being part of your offer terms or even something discussed before you put in an offer. If a seller shows a lot of hesitation to enter into this type of agreement, there is a good chance there is something they are trying to hide.
When requesting an estoppel agreement, ensure that it contains the following information:
- All tenant and occupant names
- Lease terms, including start and end date
- Rent amount and due date
- Security deposit amount
- Utility arrangement (who pays, etc.)
- Appliances (who owns them, etc.)
- Pet addendum information, if applicable
- Current maintenance list, if applicable
- Any other addendums
Both you and the inherited tenants should sign this document. Keep it on file for reference later on. This document shows certain terms. If a tenant later tries to claim something different, you can bring up this agreement to clarify any confusion and prevent big fights.
Step 3: Check Your Purchase Contract
Once you move forward with purchasing a property, your sale agreement will include a purchase contract. This contract should detail information about the lease agreement, the tenant, and other basic information. In an ideal situation, it will also include the estoppel agreement and copies of all documentation the landlord has on the tenants that they are permitted to share.
Additionally, the contract should detail how the security deposit will be transferred and exactly when the lease agreement will transfer to you as the landlord. Looking through all of this information carefully will ensure you have all of the information needed to take over as a well-informed landlord.
Step 4: Communicate With The Tenants Frequently
Another way to get more detailed information about how the rental unit is being managed is to talk directly with the tenants. One way to do this is to deliver a change of management notice to the tenant. This document informs the inherited tenant about new contact info, where to pay the rent, and how to report maintenance issues.
If you did an estoppel agreement, the tenant might already be aware of who you are and what you are like. Still, it is often a great idea to do more than just pass paperwork back and forth.
Many landlords make a personal visit to meet the tenant. You can take the opportunity to get more detailed paperwork filled out then if you need it, such as setting the tenant up on your property management portal.
Additionally, asking follow-up questions about total occupants, pets, and more can help landlords compare the current household to what is on the lease agreement if you did not have an estoppel agreement.
Expert Tips: Inheriting Tenants
Though some landlords prefer to only purchase unoccupied property, there’s no doubt that sometimes moving on a hot market requires you to buy occupied property. Long-term landlords often have experience inheriting tenants. Here are some of their best tips.
Tip #1: Review The Tenants
Many landlords don’t bother to screen inherited tenants before extending their lease. Sometimes, this lease renewal happens as soon as one or two months after the purchase is complete. At this time, it’s a good idea to have inherited tenants fill out your standard application and screen them as you would a prospective new tenant.
Though you will still need to follow the terms for lease renewal outlined in the original lease, this information can help you renegotiate or end a lease as needed. Take lease renewal as an opportunity to ensure that your inherited tenants are a good long-term fit for your business.
Tip #2: Consider Rent Increases Carefully
When purchasing a property in a hot area, you may be tempted to raise the rent on each unit as soon as possible. As leases end, you might bump up the rent in the new leases to ensure that you are matching with the local market. However, there are pros and cons to this method.
If you decide to raise the rent immediately, you may have many unit vacancies at this time. Some tenants will not be able to meet your new prices, and they will move on to a new property instead. This means you would need to fill these vacancies in order to turn a profit at your new rent price.
On the other hand, you might decide to keep the rent the same for existing tenants and then start raising the rent as the properties gradually vacate. Changing rent as you bring in new tenants rather than raising it on existing tenants can give you a chance to transition if you don’t have the capital to manage a large number of vacancies at once.
Ultimately, it is up to you to decide which of these paths to follow. The key is to remain aware of what you can and cannot take on as a business.
Tip #3: Screening Tenants And Applicants
Whether you’re filling a new property with tenants or getting ready to renew a lease for inherited tenants, it’s a great idea to go through a tenant screening process to ensure that you know what you are getting into.
High-quality tenant screening gives you factual and reliable information about potential tenants, and this information can be invaluable. To get the best tenant screening, visit RentPrep and find out what type of package will best fit your needs.
FAQs: Inheriting Tenants
Can I raise rent on inherited tenants?
Once you purchase a property, you take over the individual leases of any tenants living in the property through the purchase agreement. To raise the rent, you must follow the rules laid out in those leases.
In most cases, rent can only be changed after the initial term period is over and the lease is either renewed or converted to a month-to-month lease. Some lease agreements may allow you to increase rent by giving a certain amount of notice; this is especially common if you are dealing with a month-to-month agreement.
Review the lease agreement you have on file to find out how to change the rent. Make sure to communicate rent change information clearly to inherited tenants, to prevent any distress or confusion.
How can inherited tenants be evicted?
As the new owner of an occupied property, you are obligated to honor inherited tenants’ rights and follow the original lease agreement. At the same time, the tenant is also obligated to honor that agreement.
If an inherited tenant is breaking the lease terms by not paying rent, destroying the property, or committing another serious violation, you can follow the standard eviction practice. This should be mentioned in the original lease, but you can file for eviction if the lease is being violated in any serious way.
Consult with a local lawyer to confirm how much notice you need to give the tenant for any particular violation, or you can also consult your local landlord–tenant laws. Once you give the tenant notice to quit, they will have a limited amount of time to respond or leave the property. This is the best way to handle evicting inherited tenants.
If an inherited tenant has not violated their lease, you will need to wait for the original lease term to end before you can end the agreement and request they leave.
Do I have to renew a lease with inherited tenants?
While you have to keep the existing lease with inherited tenants, that does not mean you are required to renew the lease. When the lease agreement is up, either party is free to end the lease with proper notice. If you do not want to continue renting the property or renting to that tenant, you will be able to end the agreement in most areas.
Inheriting Tenants: Business Sense Or Nonsense?
As you learn about handling inherited tenants, it will quickly become apparent whether or not this is the type of business arrangement you are comfortable with. If you don’t feel that working with inherited tenants is going to work for your rental business, focus on acquiring vacant properties instead.
Depending on what market you are working in, you might miss out on some great deals. Properties on the market with tenants already in them are sometimes listed at prices you won’t find otherwise. As long as you do your research, you can turn these savings into fantastic long-term profits.
Regardless of how you feel about inheriting tenants, learning more about handling them ensures that your business is ready for anything.