As a real estate investor, you will come across units with tenants in-situ. Is this a reliable income source or a troublesome and expensive headache?
As an investor it is likely you will come upon the purchase of a condominium that already has a rental tenant in place. This can be a bonus, since you will receive income immediately without the hassle of advertising or screening tenants. However, it is not always an ideal situation.
Here are five things you should consider before committing.
Tour the Suite Without the Tenant
Get permission to walk through the suite, preferably on a Sunday. Are there signs of a party? Do you smell marijuana smoke? Is the suite clean? Are there signs of damage, especially to doors and flooring, or are more people living in the suite than expected? Also, quietly ask the strata corporation if there have been complaints about the tenant.
How Much is the Rent?
In BC the annual rental increase allowed in 2016 is 2.9 per cent, but it has been in the 2.1 per cent range for years. However, when a tenant vacates, the landlord can raise the rent to perceived market value. If the in-situ tenant has been renting for some time, the rent may be much lower than you could achieve in the current market. If you decide you don’t want the tenant, arrange for the existing owner to end the tenancy if your timing allows. This requires two months’ notice to the tenant, but means you start with a clean slate.
There can also be concerns if the rent is unusually high or low. A relatively high rate of rent should prompt you to ask whether that rent is sustainable, and how long the tenant has been paying it for.
If they are on a short lease, with the rent jacked up, you can't always be sure it hasn't been done to make the property seem more attractive. Always question suspicious-looking figures, particularly when you've compared them to the rent for similar condominiums in the same neighbourhood.
What is the Lease Agreement?
If a tenant is on a fixed rent, you cannot make them leave and the tenant cannot break the lease just because the property has changed hands. You can attempt to negotiate a break-lease situation on mutually agreeable terms, but there is no obligation for either to accept. When a property is sold, a lease is transferred to the new owner, not voided. Occasionally, special clauses have previously been inserted to allow the void of a lease in the situation of a sale, but this is uncommon.
A periodic lease, which is sometimes adopted automatically after a fixed-term has lapsed, will often see the tenant able to provide a shortened period of notice to vacate. If you're hoping for a long-term renter, this may not be an attractive prospect. However, if you are unhappy with the current tenant, this can provide you an opportunity to re-advertise the home for rent.
Ask About Side Agreements
Sometimes the existing landlord may have agreed to certain conditions, perhaps allowing a pet or providing special repairs and improvements to the suite. In some situations you may be bound to these agreements, especially if they are in writing.
How Easy Would it be to Rent?
Ask yourself whether you could easily rent the condo if it were vacant. This means checking out Craigslist and other sources for comparable condo rentals in the area. Putting a tenant in place that you have personally checked out may be worth it to you in the long run.
by Frank O-Brian.