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Is Currently-tenanted Property a Good Buy?

rental rateProperty investors are not averse to the concept of currently-tenanted properties. In fact, they quite like the idea for various reasons. This said, the move can completely backfire and what you stand to gain (because you will fetch rent from the very first day) may not offset what you lose in terms of capital growth. So while choosing an investment property, do not be too swayed by the fact that it is currently-tenanted.

Merits of a currently-tenanted property

Of course, such homes can have their fair share of merits, too. If the tenants are reliable, the new owner—you—will have immediate access to rental income, will not have to fork out the agent’s upfront fee and will not have your peace of mind disturbed in the months immediately after the acquisition. Before you invest in a currently-tenanted home, take a good look at the lease agreement.

Break-lease agreement

I had a client who had bought such a property in the past only to learn later that the tenant was on a break-lease agreement. Now this client of mine picked this property despite some of its flaws. He was way too satisfied with the fact that he would be able to fetch immediate rent and save himself the trouble of paying mortgage out of his own pocket.

Then the break-lease agreement shattered his property investment dream, with the current occupant leaving immediately after the property changed hands. My client suffered from a dismal vacancy rate in the following months. Not only did he have to pay rent for 6 months out of his own pocket (negative gearing) but he also missed out on a decent capital growth because of the inherent flaws in the property. As stated earlier, you must check (and recheck) the lease agreement.

Duration of tenancy left

The new owners can work out a mutually beneficial agreement with the current tenant. It is ideal to look for those currently-tenanted properties where the occupants have not been there either short enough or long enough. In the previous case, the tenant would not have resided there long enough to be deemed reliable and in the latter case, he might be paying a “below market rate”. New owners should learn about the lease agreement in such cases and should the remaining duration of the lease be short, they can opt to keep the rent as low as it had been till the time of the renewal of the lease agreement.

Making a thorough assessment of the market condition is crucial. It will give you an idea about what you may be losing in rent and if you can really afford to buy a property just because it is currently-tenanted.