Buying a Property with Tenants: What to Know

  • 7 months ago
hand grabbing a row of wooden homes

When you decide to buy a home, it’s not something you take lightly. There can also be numerous complications that arise as part of the process, especially if you buy a house that has tenants.

If you’re buying a house as an investor, choosing one that already has tenants can be a win-win or an ideal situation, but if you’re planning to use the home as your residence, it’s different and can be inconvenient at a minimum.

Regardless of being in either situation, you should understand the implications for you as a buyer and potentially as a landlord.

If you buy a house, whether it’s single or multi-family, and it has existing tenants, the rental income already being generated may help you get a loan if you’re purchasing it as a rental.

You’re buying someone else’s home at this point, so the tenant has all the rights they were granted as part of their lease. You agree to take on these obligations as their landlord, so you want to ensure you fully understand all state and local laws before you jump into this situation.

Tenants’ rights can vary a lot between states, and there are some states where the laws favor the tenant, and others favor the landlord. Buying a house in a state that favors tenants is doable but something to be aware of.

The most important individual thing you can research beforehand is the existing terms of the lease. The current owner and tenant more than likely signed a lease agreement, which at its core states the tenant can live there if they pay their rent.

You may be able to ask them to leave, dependent on your state and the terms of the agreement, but there’s also the potential that you can’t.

If you become a landlord, a lease guarantees the tenant has the right to live in a safe and healthy environment. If you decide to take it on, you’ll have to keep that up as the new owner of the property.

Along with inheriting the lease terms, you’ll also have to adhere to whatever the other landlord obligations are in your state, such as complying with building and health codes, ensuring the systems are functioning properly, and responding to repairs promptly.

As a buyer, one particular risk you could face with a tenant-occupied property is that it might not be up to code currently. You could be liable if the past owner didn’t maintain the home properly.

The pros of buying a property occupied by tenants, if you’re going to be a landlord, include that you don’t have to find them and you have a source of immediate rental income.

The cons are the legal risks you’re inheriting, the fact that you have to honor the lease terms, and the fact that it can be tricky to remove a tenant.

Property rights attach to a property rather than an owner, so again, if you become the new homeowner, you still have to honor whatever the lease terms are.

If you’re buying a house with tenants but hope to live there, you can’t use that as your sole reason to remove them. You have to wait until the lease comes to an end, and from there, you have to ensure you’re compliant with laws that require you to notify tenants you won’t be renewing their lease.

Eviction of a tenant is expensive and tough to do.

If you plan to buy a home to live there, it’s almost always best to avoid choosing one with current tenants.

The exception might be if you include terms in your purchase contract with the current owner that require them to end the lease before you close the sale. They’d have to have a lease allowing them to do so, or they’d have to incentivize the tenants to leave. Some states can use a move-in eviction, allowing property owners to retake possession of a tenant-occupied home if they’re going to live there.

The best thing to do when you’re buying a property or thinking about it, especially with tenants, is to research and understand your potential legal responsibilities and liabilities. Tenants can be valuable if you’re buying a multi-family property or one you plan to rent. When buying a home you plan to live in, avoiding homes with tenants is optimal.

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