What if Tenants Exist on Your Investment Property?
Two segregate scenarios can develop at the time you buy an investment property. In the first one, you get a property, completely vacant, and you can either treat it as an ‘owner-occupancy’ kind or you can opt to rent it out over the next fortnight or so. What then is the second case?
If there are existing tenants
The second case is if the property comes with existing tenants. In other words, the property the seller/vendor has sold to you has already got a rental lease running. Now, once again, there can be two cases.
Let us say you have had the misfortune of encountering a dubious vendor. Such vendors can cunningly rent out their properties 15 days in advance of exchanging the sale contract, giving the impression of “easy rent-out” to the buyers. In times when rental returns are just so important for positive gearing, any investor (who is not sold to the idea of capital growth) loves the idea.
However, in the scenario I have just put forth in front of you, may be the property is not all that enticing to the tenants and that the seller has given it out on rent at below market rates just to create a false impression. You can well assume how this can hurt you as a buyer.
Property managers of your investment property
Second case is if the property has genuinely good existing tenants who collaborate with the property manager allotted by your vendor to talk about everything from rent to repairs to landlord insurance.
As a first, you have got to remember (and prefigure how it may cause you financial hurt) that most of the rental leases are non voidable. This implies that even if a home is rented out at below market rate, you cannot annul the lease or opt for a higher rental rate (if it is a fixed rate home loan). Yes, it would affect the positive cash flow of your portfolio but this is how it is.
An example to illustrate problems of weak rental rate
To your credit, you can ask the vendor for a bargained price which may offset the rental loss, calculated over the remaining duration of the fixed term. To give you an example, let us say you have just bought a home and it seeks $500 a week from its existing tenants. You get a feeling that you are making a loss of $200 a week. Let us further assume that there are 11 months to go before the fixed term contract expires.
In the given case, you are running an estimated loss of $200 a week. Over 48 weeks (11 months), this amount comes up to $9,600. You can definitely present this information to your vendor and there is a good chance he will heed your request for a reduced selling price.
Have you got a sour deal with any of your investment property purchases?