Are tenanted properties the right option for you?
Tenanted properties tend to have a reputation for being the investor’s jackpot. On the surface this may seem true, but this is where investors can get in trouble. Often times what may seem like a great opportunity can backfire horribly if not researched beforehand.
Although it seems like much of the work is already finished if a property is tenanted, this can very often be a negative. If you are in this situation or it relates to you, carefully study this article so that you can be certain that the tenanted property you’re looking at is right for you.
The Potential Pitfalls of Diving Straight in
Before assuming the best and going for the purchase, detailed research must be conducted as to why the property is still tenanted and is it for the wrong reasons.
The most common pitfall is that the tenants are substandard. Often-times this is the very reason as to why the property is up for sale in the first place.
Management disagreement can sometimes be the issue, especially when the current tenant has unrealistic expectations. A very real and potential scenario could be that you’re forced to put a property manager in charge, and that shift of responsibility and routine for the current tenant causes issues.
Often-times it is not advised to investors if a tenant is short term or not. Many of the times when they are, the rental price is elevated which at first sight will create an attractive deal for the investor. When price is the deciding factor, you will be in for a shock when it comes time for the tenant to leave. Not only do you need to find a replacement, but one at standard market price.
In rare cases, tenants can be quite opportunistic or even greedy, for lack of a better word. This can be common when the investor is a beginner. As soon as you take ownership, there may be unrealistic material demands made upon you for improvements that the other vendor did not consider.
These are just some of the potential pitfalls that could arise. Although there are more, the foundation you need is research. As an investor looking into a tenanted property, you must be willing to put in the time to find out as much as possible to be certain that the property is tenanted for the right reasons.
The Importance of the Lease Agreement
So you’re now certain that the property is tenanted and none of the above or other issues are apparent. There are certain variables that you will need to look at to avoid any silly mistakes, and these involve the tenants.
A common thought that ponders around new investors heads is whether they’re eligible to kick out tenants or not. This would especially be critical to know if they fall into one of the negative categories mentioned above. This brings us onto the lease.
Is the lease fixed term or periodical?
A fixed term is exactly what it sounds like. For whatever period the contract is set (usually 6-12 months), it cannot be terminated unless the tenant and new owner make an agreement. Alternatively, a periodical lease is the opposite. A monthly contract is usually the case in which the tenant can be granted 60 days notice to vacate.
Aside from the above, it is critical you know other details about the lease so that you’re in control. What is the amount of bond held? Are inspections held, and how often? How much does the tenant currently pay in his or her current contract? All these questions can be answered in the agreement or with a bit of investigation and communication.
As always and as mentioned with tenanted properties, research comes first. Use this information as a guideline as to what to look out for immediately, with every different circumstance there may be a different factor involved with the tenant. It’s worth going to the trouble of finding out as much as possible before making an investment that could be potentially detrimental. Contact us to research your next investment.
