Buying a tenanted investment property
Opting for a tenanted investment property may provide you with instant rental income, but you need to do some groundwork to ensure that the quality of tenants and the lease terms are favourable.
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Buying a tenanted investment property has several upsides: immediate rental income, security and fewer costs dedicated to hunting for a high-quality tenant – but is it as good as it seems?
Although a tenanted investment property can provide several benefits to property investors, there are some things you need to be aware of before you commit to a purchase, namely the terms of the existing lease contract in which you are bound by and taking the time to discover the type of tenants you would inherit.
How to protect yourself
1. Seek independent advice
Make sure you review the terms of the lease and seek independent advice from a solicitor or conveyancer so that you fully understand the contract. Review sections of the contract including the lease term, when and how rent may be increased, and the inclusions of the lease payment.
For instance, the contract should outline exactly what’s included in the lease payment, such as whether utility and internet costs are included.
2. Speak to the property manager
Before signing on the dotted line, make sure you speak to the property manager so that you know what kind of tenants currently live there. Find out about their rental history, employment, how long they’ve been renting the property, and whether there have been any issues in the past.
Knowing what to look for in a tenant can help you decide whether or not they are likely to be good quality tenants.
Make sure the bond has been lodged
It’s important to check that the bond amount has been lodged property. The property agent will organise for the bond guarantee to be transferred to your account at settlement.
Check there are no rental arrears
Make sure there are no rental arrears. If there is, identify that this amount is deducted from the purchase settlement amount.
Also, find out how often the property is inspected and ensure that you’re satisfied with this.
3. Do your research
Look into local property prices and average rental yields to get a feel for what people are paying in the area. This will help you determine how much rent you should charge for your investment property and whether it is a fair price or not.
Scan the market for other properties for sale and for rent. Consider whether you could get a better price on a property without a tenant even if it means having an untenanted property for three months?
Increasing the rent
If you believe there is grounds to increase the rental amount, and if the lease allows you to do so, you need to consider whether this will be worth it. If you increase the rent, this may deter a long-term tenant so you need to work out whether it is worth it.
Work out whether the amount you’d like to increase the rent by equates to more over the year than the lease fee plus any rent lost if your property is vacant for a period of time.
4. Review the property report
Take a look at the property report and make sure that it accurately reflects the condition of the property. If you have any concerns, organise a building and/or pest inspection to identify any issues with the property such as the presence of termites or mould.
5. Evaluate property manager performance
Don’t make the assumption that you can’t change the property manager. You can choose a new property manager or decide to do the job yourself. However, if the current property manager is reliable, then their knowledge and history of the property and tenants may be useful.
Buying a tenanted investment property can bring about several advantages, but your investment decision should be based on a plethora of factors including; the location, the structural integrity of the property, capital gain potential and whether or not the purchase fulfils your investment objectives, rather than simply the fact that it is currently tenanted.Back to top
What are the pros and cons?
- Rental income. Buying a tenanted investment property means that you receive immediate rental income which can help repay your investment property loan. This will help your cash flow as you won't have to worry about covering your investment loan repayments during an untenanted period.
- Less costs. As the property is already occupied, you don't have to spend extra funds advertising for new tenants or organising repairs and maintenance to attract tenants. You also don't need to pay a letting fee.
- More time. When you purchase a tenanted property, you don't have to spend time sifting through applications, conducting background checks and choosing the right tenant.
- Security. If the property is occupied by long-term, high quality and reliable tenants who pay their rent on time and who cause minimal fuss, then this is an asset in itself. This means that you don't have to worry about dealing with difficult tenants who have demanding requests.
- Unfavourable lease terms. When you invest in a tenanted property, you assume the current terms of the lease which can be restrictive. If you want to conduct repairs or maintenance, it may be difficult depending on what is outlined in the lease. There may be terms of the lease that are unfavourable, such as if property inspections are too infrequent.
- Undesirable tenants. A downside to buying a tenanted property is that if the tenants are difficult, you can't replace them with new tenants until the lease expires. This can be an issue if you don't get along with the tenants or if you want to increase the rental amount.
- Limited security. If the lease is nearing its expiry date, then the tenants may be able to vacant the premises with short notice. This may mean that you find your property untenanted very quickly. This is why it's important to check whether the lease on the property is current or the tenants are on an expired lease.
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