Tips for buying a property with existing tenants in situ

If you’re considering buying a property that currently has tenants in it, then there are several things you need to consider when purchasing a property like this. If you’re an experienced landlord, then many of these will be obvious, but for newer landlords or first-time landlords there are some important things you should checking. As with any investment property, you need to carefully consider your own short and long term plans. You need to consider if you want this property to remain as a rental property longer term.

Buying an investment property with tenants in situ has advantages and disadvantages and you should weigh up any potential pitfalls before deciding to buy. Also, some people inherit or take ownership of a property with in situ tenants and if this is you, then read on.

Can you buy a house with tenants in it?

The simple answer is yes. Some landlords and the current owner may take the decision to sell with an existing tenant because they don’t want to evict the tenant because they are a good tenant. It’s worth noting that in some cases, the tenant can’t be evicted, for example if the sale is happening during the tenancy term.

Is it good to buy a property with current tenants?

You may well be able to buy the property at below market value with an existing tenant, which may seem like a good deal, but you need to consider the pros and con of this arrangement carefully first as there may be hidden costs you don’t consider initially. You will also hopefully receive rental income immediately on the purchase of the property.

The pros and cons of buying a property with tenants

We explore the pros and cons of buying a property with tenants in situ, you need to consider all these carefully before you buy the property.

Pros of existing tenants

You’ll get rental income immediately – Generally, if there is already a tenant in place then the rent is paid from the first day you take ownership to you, which is a very attractive proposition for the purchaser.

You may get a cheaper purchase price - Properties with current tenants are usually cheaper, because generally they are harder to sell. This can be particularly good for cash buyers (as it may be harder to get a mortgage with in-situ tenants).

You don’t have the cost and time to look for tenants – If a tenant is already in place it will save you the time and cost you’d normally incur to find a tenant.

No need to refurbish the property immediately – Most properties are refurbished between tenants. If the current tenants are happy with the property, then you won’t need to spend money on immediate refurbishment. However, it’s worth checking the current tenants are happy and are not likely to leave because of the condition of the property.

Cons of existing tenants

Getting finance / mortgage - Some lenders are reluctant to finance a property with current tenants in it. You may need to find a larger deposit and it is likely to cut down your choice of lenders and may cost you more for the mortgage. Do your figures!

Added risk – There is no doubt that buying a property with tenants in it is a bigger risk. If the previous landlord didn’t have everything legally sorted, then this risk will fall to you when you have purchased the property. There are some checks you can make to minimise this risk (see below).

The wrong tenant - The current tenant may not be right for you. If you haven’t chosen the tenant yourself, they may not be your ideal tenant.

Difficulty removing the existing tenant – Getting rid of an existing tenant may be difficult and costly if you decide you no longer want them as a tenant. Check the status of their tenancy agreement, check the tenant has been given the right paperwork before you buy the property.

Added costs – As well as added costs of the finance on the property, there may well be added costs for a specialist solicitor to check out the tenancy agreements and all the right paperwork is in order, or potentially added costs to later remove the tenants if they are not right.

Things to check before buying a property with tenants in situ

It’s definitely worth using a solicitor or conveyancer that has experience with properties with sitting tenants. These professionals should know all the areas that need checking and the questions that need asking, but here’s our summary below.

Questions to ask when tenants in situ

• Is the property licenced? Some rental properties must be licenced, specifically HMOs.
• Does the property have valid energy performance, electrical and gas safety certificates?
• Are fire safety measures in place and when were they last checked?
• Have portable appliances been tested in the last 12 months?
• Is the property furnished and do the furnishings comply with fire resistant standards?
• Have you had a full inventory that was taken at the start of the tenancy?
• Have you seen a copy of the current tenancy agreement – how long is left on the agreement and is it all legally in order?
• Has the deposit been registered, with which scheme and how will this be transferred?
• When is rent due, how do the tenants pay rent, and has it been paid on time?
• Was the tenant given a copy of the ‘How to Rent’ guide?
• Is there any future renovation work needed soon – i.e., new boiler etc?

You and your solicitor need to do all the checks necessary. You should never take a current landlords word for anything as they are just focussed on selling. Speak to the tenants and check there are no further verbal arrangements in place.

Will a property purchase with an existing tenant be profitable?

This will differ depending on the price you pay for the property, the cost of financing it and all the considerations above. Work through the figures carefully when you have all the appropriate information from your solicitor.

Viewing a property with existing tenants

Viewing a property with tenants shouldn’t be vastly different to viewing one without. You need to ensure you have an in person viewing of the property at least once and ask for a second viewing.

Check its general condition such as electrics, boiler, damp etc. Look for any future maintenance problems. View again before final completion to ensure it hasn’t vastly deteriorated.

Talk to the current tenants as soon as possible in the process. Ask about their view of the property, any problems, their future plans etc. Double check this all with what the current landlord tells you to check for any discrepancies.

Checking out the tenants

Your conveyancing solicitor should carry out checks on the tenants as you would do with new tenants. Do things like a credit check, employment check, and ask for previous landlord references.

The current tenancy agreement

An existing tenancy agreement is still valid after the property handover. Speak to the tenant to see if they would be happy to sign a new shorthold tenancy agreement with you that will last for a minimum of 6 months. If they don’t agree to that you and they are still bound by the original agreement.

What happens to the tenants deposit when buying a house with existing tenants?

With various deposit protection schemes, transferring the deposit from the current landlord to you should be easy. Normally your solicitor will notify the deposit scheme of a change in ownership. This will only be more complicated if you want to transfer the deposit to a different scheme.

Handing over the property

It’s always simpler if the completion day of buying a house falls on a day when the rent is due. If this isn’t possible or doesn’t happen, you can legally arrange apportionment of the rent. Ensure you give tenants adequate notice to change their standing order for the rent.

What is a Section 48?

A Section 48 notice must be served to inform the current tenant that the property has been legally transferred to a new buyer. If this isn’t done, you can’t claim for future rent arrears, property damage, and service charges.

Building a good relationship with the tenants

Introduce yourself as the new landlord and your agent if you have one, to the new tenants as soon as possible. Reassure them and explain about their deposit transfer and their tenancy agreement continuation. Tell them of any plans you have for the property in the near future like significant improvements etc.

What rights do existing tenants have?

Existing tenants generally have more rights than other tenants, which is why you should look for a discount on purchase price with existing tenants in the property. It is generally much harder to evict a sitting tenant. The only way to evict a current tenant is if they fall into rent arrears or you can provide them with other suitable accommodation.

They may also have protected rights regarding any immediate increases in rent.

If you do want to consider evicting a sitting tenant, consult a specialist solicitor for advice.

Buying a property for a cheaper price with an existing tenant, can be attractive. However, as you can see above, there are many things to consider before jumping in and purchasing a property with tenants in place.

Here at dns we have a specialist landlord team, and we can help and advise you and put you in touch with the right people if you’re considering this type of purchase. Call us on 03300 886 686 or email on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.