When you invest in rental real estate, you may inherit existing leases. Existing leases and the terms of those leases become part of that purchase. That means that you cannot raise the rent, modify the lease or boot a tenant out based on you being the new owner.
Early on in my acquisitions I went to my closing on two adjacent duplexes only to learn that the seller’s broker had renewed two leases for another year the night before the closing. The deal was too good to pass up. While the unexpected lease extensions weren’t enough to halt the deal, they did present hurdles going forward.
When I buy properties for personal use, I always have a preliminary plan and a back-up plan.
So understanding that two of the four tenants would be allowed to continue to stay another 365 days, I turned my focus to upgrading the exterior of the buildings plus the wholesale landscaping of the grounds that had been overlooked for 50 years. It turns out that plan became my template for future real estate purchases of all kinds. I still approach all real estate buys with the intent of making over the exterior. I find that when people drive by and notice improvements it piques their interest. I look at it as they could be the next tenant.
You do have options. You can have your Realtor include the stipulation in the contract that the sale is contingent on the residence being vacant. That requires the seller to terminate or renegotiate the lease before closing. Or you can buy out a lease. Better yet, if a month-to-month lease exists, you can use the terms of the month-to-month lease to wrap it up early.
What I’ve found in my experience varies. Generally if the tenant is undesirable—engaging in criminal behavior, or even questionable acts—they will likely end up working their way out of a lease by violating the terms. One example: We had a guy in his late 50’s living in a multi-unit building we bought. We installed a Nest Cam system and one day observed him in the maintenance shop stealing tools. Right about that time, he allowed his grown daughter to stay with him. Within days the daughter’s boyfriend fresh out of prison showed up. We were in the process of working our way through the building emptying everything from these ‘80s-decorated apartments into dumpsters…from the drapes and curtain rods to the appliances. So we posed this to the guy: Move out by Friday and you can take all the furniture in the apartment with you. He said he’d think about it. Fifteen minutes later he called back to ask if he could take the appliances. I said sure. By Friday he was out of the property. And the best part is we didn’t need to rent a dumpster like we’d had to for the other units we were upgrading.
And I’ve also had the pleasant experience of inheriting tenants that remain tenants to this day in multi-unit and duplexes. They are cooperative, allowing us to work around them during renovations, and over the years of course signing renewal leases.
Bottom line: Stable tenants are what pay the bills and ultimately make an investment property profitable.
