When purchasing a multi-family home to rent, you will have to honor all the current leases that the previous owner signed with tenants. Most of the time, existing leases do not cause any issues. In fact, many landlords would prefer to purchase a building that already has tenants in it than one that is unoccupied. In some cases, however, existing leases cause problems for new property owners. Here is how you can purchase multi-family houses with confidence, knowing that the existing leases will not cause you any trouble.
Transfer All Security Deposits Security deposits are held by landlord as a form of insurance against any damage tenants might leave when moving out of a unit. If a tenant leaves a unit damaged, then, as the landlord, you can use their deposit to pay for repairs. If they leave the unit in good condition, then you must return the deposit to them. Either way, you will need the current owner of the building to transfer the full amount of all security deposits to you at closing.
Once transferred, you should put these funds in an escrow account. Landlord.com has a chart on each state's exact requirements for holding security deposits.
Identify and End Troublesome Leases During the building inspection, you will be able to walk through each unit. While inspecting the building's structure and appliance's condition, also look for any potentially troublesome units or tenants. Watch for:
- signs of pets, especially cats and dogs
- evidence of indoor smoking
- more people living in a unit than are on the lease
Any evidence of these situations may increase your expenses when the tenants move out. If you do not want to allow pets, smoking or high occupancy, then you should ask the current owner to terminate these leases before closing on the property.
Ask the Current Owner About the Tenants
The current owner of the building should be able to discuss the tenants' histories with you. In addition to reviewing each of the leases yourself, you will want to know each tenant's payment history. Have any of them ever been late? If so, was there a one-time emergency, or is it a general patter with them? The current owner should be willing to sign a statement with these details.
You should also ask about any complaints filed by tenants. Whether against the landlord or another tenant, complaint histories can help you see what the current tenants are like. In large apartment complexes, there are usually formal complaint records. When purchasing a duplex or similar house, the formula for complaints is often not as formal. It may be simply through personal conversation. The current owner should be willing to put in writing the history, even if it is informal.
One or two troublesome tenants may not be a deal-breaker. Review each case individually. Perhaps their lease is up soon, in which case you do not have to renew it. If you are afraid of damage caused to the unit, try negotiating a lower selling price on the entire building.
Run Credit Checks on Tenants
Many landlords use credit checks to vet possible tenants before renting apartments. Since you will soon be the building's new landlord, it makes sense to run credit checks on the tenants. You will need their permission to do this. Tenants have the right to refuse, but you might as well ask.
Most of the time, purchasing a rental building is a smooth transaction, but it is important to approach the process prudently. As long as you transfer the security deposits, end any troublesome leases, interview the current owner about tenants and run credit checks, you should be in a good position to assume ownership of the building as its new landlord.