It can mean immediate rental income from the day you own it, but is buying a property with tenants already living in it really a good idea? Read on to find out the pros and cons.
When a buy-to-let property is sold with a sitting tenant (also known as a tenant in situ), it means there’s a tenant currently renting the property. Depending on the terms of the tenancy, the tenant will continue to live in the property when the purchase has gone through.
When you complete on a property with tenants in situ, the tenants and furniture (if it’s furnished) can remain in the house and you take on the tenants, as well as the previous landlord’s tenancy agreement.
The terms of the agreement and the amount of rent charged will remain the same until the fixed-term contract ends. If you want to make amends to the tenancy agreement, you’ll need to discuss this with the tenant, but you can’t force any new terms on them.
Buying with a tenant already in place can have its benefits. You’ll be earning rental income from the day you purchase the property, for starters, and you could inherit long-standing and trustworthy tenants.
But you should consider a few things before going ahead.
For example, are you happy with the condition of the property or would you prefer to refurbish? Does the property properly and adequately comply with safety regulations?
If you think a complete overhaul of the property is needed, it can be difficult to get that done with tenants already in place.
For these sorts of reasons, some landlords prefer to buy a vacant property, so they can make all necessary changes before renting out the house.
It’s also important to ask the current seller for a copy of the tenancy agreement and investigate whether the tenants in situ are reliable, trustworthy and a good fit for you. Check on things like if the tenants have a history of rent arrears and if there are any ongoing issues between them and the landlord or neighbours that are yet to be resolved.
Buying a property with existing tenants can make life easier for you because:
It’s vital you use a solicitor who’s experienced in dealing with these sorts of purchases. As well as the usual conveyancing checks and legal processes involved in transferring ownership of the property to you, there’ll be other necessary checks regarding the property, tenants and the tenancy agreement.
Does the property have a valid energy performance certificate (EPC)? Has it had a gas check? Are smoke alarms and carbon monoxide detectors in place?
Was this carried out to show exactly what was in the property when the tenant moved in? If not, you’ll need to compile one
Get a copy of this so you know what type of tenancy was in place when it started, and where the tenant’s deposit is being held. If they have a protected tenancy, it might prove difficult to make changes to it or to remove the tenants, if required
Investigate whether there’s any history of rent arrears and if the tenant takes adequate care of the property. Can you see the references and checks made on the tenants? Do they have rent guarantors? Are there any ongoing disputes with neighbours?
It’s always a good idea to take the time to view the property in person, rather than rely on a video tour.
That way, you can see the condition of the house and if it’s in good order, whether it needs any updating, or if there are any obvious problems.
Meet with the tenant, too, to gauge whether you’ll get along.
Any cash deposit paid by a tenant to a landlord should be protected with one of the government-approved tenancy deposit protection schemes. You’ll need to confirm with the seller that they did this and then arrange to have the deposit transferred to you. You’ll then need to re-protect the deposit under a tenancy protection scheme.
While their tenancy agreement is still in force, the tenant has a contractual right to remain in the property, even if it’s sold, until the agreement ends.
After that, if the tenancy is an assured shorthold tenancy agreement (AST), then as the landlord, you can give tenants a section 21 notice of possession if you want them to vacate the property after a fixed-term tenancy agreement ends.
Or you can give them a section 8 eviction notice if they’ve broken the terms of the tenancy (such as non-payment of rent).
However, if the tenancy began before 15 January 1989, the tenant will be protected by the Rent Act 1977. This gives the tenant stronger rights and means the landlord can’t issue a section 21 ‘no-fault’ eviction notice. Instead, you would need to get a court order and have a legal reason for eviction, such as rent arrears or unauthorised subletting.
You may find it more difficult to sell a house with tenants in situ due to the extra risk and complications. It may even affect the value of the property.
You’ll need to inform your tenants about the sale in advance and you should give them at least 24-hours’ notice before every viewing.
They’ll naturally be concerned they’re at risk of being evicted by the new buyer, so you’ll need to reassure them that their tenancy agreement will remain valid until it ends.
Also, let them know that their deposit will be passed to the new buyer who will re-protect it.
It’s not impossible, but there’ll be a smaller pool of lenders to choose from.
That’s because some mortgage providers see properties with tenants in situ as more of a risk, especially those who have protected tenancies. It might be wise to enlist the help of a specialist mortgage broker.