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Buying a tenanted property

Discussion in 'The Buying & Selling Process' started by Caffeine User, 22nd Jun, 2015.

  1. Caffeine User

    Caffeine User Member

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    I am currently looking at a property in Brisbane that is selling with tenants.

    Would appreciate some general comments on how I can improve DD with respect to tenants. Is the selling agent obliged to provide a current lease, or any info on the tenants?

    I am not sure why the current investor would sell the tenanted property if houses are selling like hotcakes in this particular area. Should I be concerned??
     
  2. Michael_X

    Michael_X Mortgage Broker Business Member

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    Hi Caffeine User,

    A few questions I would ask the selling agent

    - How long has the tenant been there
    - Are they are a fixed or periodic lease
    - If fixed, how long until this runs out
    - If periodic, are they looking to say on and any wriggle room for rent rises

    You can certainly request for the lease contract. Generally if it's a good tenant, you would want them to stay on. Having rent from day 1 is a nice little bonus.

    On the vendor, could be any reason why they are selling. I normally ask the agent this and evaluate what their motivations are - is it price, a quick settlement, delayed settlement etc

    Hope this helps,
    Michael
     
  3. The Y-man

    The Y-man Moderator Staff Member

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    Ask the agent. The vendor might just need money for something....or their mum told them to sell because there was a price crash coming (sorry Gockie and Gockie's mum!).

    I like buying properties with tenants in place with a lease for the following reasons:
    1. agent often won't do as many opens (tenants object)
    2. cuts down PPOR buyers (who are looking for something to move into immediately)
    3. you get a good idea of what the tenants are like
    4. If the tenants are there, you get to ask all sorts of question about the building, neighbourhood etc.
    5. As Michael said, rent from day 1.

    The Y-man
     
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  4. Rixter

    Rixter Well-Known Member

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    I picked up an excellent IP located Morton Bayside in Brisbane with a tenant in it on a lease with 6 months still to run.

    It had been listed for sale once previously with no interest a few months prior, so I knew the vendor was keen to move it.

    They hadn't been getting any bites because it was still currently tenanted and because of that they were severely limiting their market exposure.

    Anyway, from my DD I picked up that it was approximately $50-$60 per week under market rent, $270 and should have been around $320-$330. The leased still had another 6 months to run so my hands were tied in trying to increase the rent a the tenant level.

    In making my offer I added a clause in the contract that the vendor pay me the sum of $1500 cash at settlement so as I could use it to offset the low rent for the remainder of the lease post settlement.

    The way I arrived at this figure was $55/w x 26 weeks = $1430 rounded up to $1500 - and the vendor accepted.

    Just goes to show there is always more than one way to skin a cat & increase your yield. I turned a low yield high capital growth property deal into a better yielding opportunity.

    Just another example how one can manufacture a better opportunity out of now where with the right background information.

    Hope this real life example has been of help and provides you with some possible food for thought in your situation.
     
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  5. Big Will

    Big Will Well-Known Member

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    Rixter I think I know the answer but thought I would clarify.

    If the vendor crossed out the clause for $1,500 at settlement, you would of gone ahead otherwise you would of dropped your price by $1,500 before making your offer.

    Hope that makes sense lol.
     
  6. Travelbug

    Travelbug Well-Known Member

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    Investors sell properties all the time. No need for concern. We are selling a few of ours. Prices have risen and I want to retire.
    Follow Michaels questions and that should give you all the info you need.
    You can decide whether you want to leave the tenant in (if on expired lease). I bought 2 properties in Blacktown in 2009 with tenants in place. They are still there. I increased the rent straight away (one by $50 as it was way under market rent). They knew they were on a good wicket and it was still slightly under market.

    I would only be concerned if there was no contract. Sometimes people rent to friends and there have been instances where getting them out is an issue.
     
  7. Rixter

    Rixter Well-Known Member

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    I required cash in hand a settlement.

    Off the purchase price does not increase your cash flow, as the purchase funds comes from borrowed funds.

    I hope this explains what you're asking.
     
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  8. Big Will

    Big Will Well-Known Member

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    Makes sense but if they crossed off that clause would you have gone ahead?
     
  9. Jerry O

    Jerry O Well-Known Member Premium Member

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    Good example Rixter. Goes to show that you need to be thinking outside the box in property investing. If you want something, ask. Worst they could say is no.

    As for the OP question, tenanted property is a good bonus. Saves you a lot of money in re-letting fees, advertisement fee, etc. and lost of potential rent whilst vacant.
     
  10. Jacque

    Jacque Buyers Agent and Bookworm, Sydney Business Member

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    Tip: if unsure about the tenants (especially if on a fixed lease) ask PM for the rental ledger- will be able to ascertain if they've ever been in arrears before.

    We buy subject to existing tenancies commonly- not a problem if terms agreeable to investor purchasers and tenants stack up.
     
  11. Rixter

    Rixter Well-Known Member

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    I did have the option to capitalise the difference if it panned out that way.
     
  12. htopg

    htopg Well-Known Member

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    Always build rapport with the agent.
    Most of the time, the agent will tell you vendor's story.
    For example, I was told that the vendor has bought a land in south west Sydney and need the money urgently to construct a new house.
    Researching the selling history of the property might give you some idea about vendor's state of mind.
    For example, if they bought for 280k last year, built a granny flat for 120k and want it for 440k, then you know they really need the money as they just want their money back without little capital gain.

    I asked current PM for tenant ledger and I could see how good/bad the tenants are.
    If they were behind rents frequently, then I might look for new tenants.

    For my last IP, the previous PM provided me a nice DVD containing all the documents (rental contract, rental ledger, all communication to/from clients, condition report, and all photos for the condition report).
     
  13. Caffeine User

    Caffeine User Member

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    Thanks for all the great feedback! I will definitely take it all onboard before submitting my offer.