This is a quick post based on a telephone call I had yesterday. You might be interested in buying a propety that has tenants in it. You could be buying as either a potential owner or as an investor. Either way, this is a purchase that will require some thought. The primary factor driving a purchase or sale with a “tenanted property” is the Residential Tenancies Act in Ontario (or I am sure comparable legislation where you live).
Residential Tenancies Act:
The legislation gives tenants clear rights. The most relevant right is the right to stay in the property (assuming they pay rent). In other words, absent very narrow circumstances, a landlord cannot simply give the tenant notice and ask him to leave. The primary “objective reason” that a “paying and responsible tenant” can be asked to leave is if the owner, or his immediate family, wants to move into the rental unit. (Now, I do understand that this is a bit of an oversimplification, but I don’t want to get sidetracked.)
Selling A “Tenanted Property” – The Effect Of The Tenant
Single Family Homes: It’s simple. It will be harder to sell the property and you will be forced to take a lower price. The reasons are:
- it will be harder to show the property (tenants require specific notice);
- the property will NOT show as well
Multi-Unit Buildings: You will have the two problems identified above. But the real issue has to do with the “quality of the tenants”. Now, here is what I mean by “quality of the tenants”.
Amount of rent paid: Remember it hard to get tenants out and raising rents is a slow process. If the rents are on the low side, the value of the property will be on he low side. Remember that all investors consider the “income stream” as part of the investment decision.
Duration of tenancies: Long term tenants are better as long as it is not at the expense of abnormally low rents. If a property has a particularly “active turnover”, you would want to know why.
Buying a “tenanted property” – The effect of the tenant
It’s really just the same conditions in reverse. I have had the experience of buying properties that were being sold because a landlord was tired of being a landlord. In some cases there were “problem tenants”.
Buying a tenanted property to live in it yourself:
You will be able to get the tenant out. That said, I would try to make it a condition of the agreement that the seller deliver vacant possession.
Buying a tenanted property to run as in investment property:
You are really buying the tenants and the revenue stream. Does this make sense for you? Remember that it is difficult to get significant rent increases (without making a separate application) from existing tenants.
1. In most cases, a tenant on taking possession will pay a last months rent. This is held by the landlord. As the buyer you are entitled to these rents and will receive a “credit” on closing. This can be helpful in finding the money for the down payment.
2. The leases must be transferred to the new owner. This is something that the seller should do and provide documentation of this on closing.
And finally – a practical consideration for sellers to think about:
If you are trying to sell a single family property (or possibly a duplex) that a buyer is going to live in, it makes sense to sell the property without the tenant. I have on occasion simply:
- told the tenant the property was going to be sold (well in advance)
- in some cases negotiated with them to leave the property. Sometimes this can be done by offering as little as one or two months rent. (Pay them when they leave).
- You will probably be in a position to get a higher sale price than you otherwise could.
Note: This blog post was written only to alert you to issues that you may want to consider. You are responsible for your own legal advice, reading the residential tenancies act, etc.
If you need consulting: