Vendor wanting to rent back property after settlement

Wanted to gather thoughts from everyone - thanks in advance!

I recently purchased a property (yay!) with a settlement early 2022. The vendor has since expressed interest in renting the property after settlement. Rent to be negotiated.

Are there any downsides for me to go ahead with this? All I could think of are positives - e.g. I can start receiving rental income from settlement date (no time gap), save on advertising costs or other touch up costs needed, less admin etc.
Just seems too good to be true when I can't think of negatives...

A couple more questions what I should do if I go ahead:

• Is it too early now to agree on the rent? With borders opening up etc, I could potentially charge higher rent than what the current average/median rent is?
• Understand I should sign an agency agreement, have a bond set up etc. Is it ok for me to go with the same agency who did the sale?
• Should I still request to vet the financial situation of the vendors/future tenants? I know I will be paying them big $$ at settlement, but I won't know for sure how much they actually pocketed and if they have sufficient ongoing income to cover the rent right?

 

1) Don’t use the sellers’ agent as a property manager. Take your new property manager to pre-settlement inspection and get any maintenance issues sorted.
2) Ask the vendor to lodge a rental application with the new property manager and let them asses income etc. etc..

 

I'd suggest getting them to fill out an application as usual, allows you to check their finances and establishes a paper trail- e.g. if there's any future problems insurance will ask.

You'll also want to get an entry condition report done with them insitu- this is important.

Make sure to establish market rent expectations, they may expect a discount.

You will need to get the usual advertising bits and pieces done at some stage, but like you say, there are a bunch of benefits putting it off...!

 

As mentioned above engage a property manager who is not involved in the transaction and follow the usual due diligence process to vet the Tennant as a suitable business partner for you.

 

Yep! Do your research, and find a good PM in the area. If you use the one the vendor did, they may be more lenient on them. Treat them like any normal tenant.

I'd let them know that you would entertain it, however they would be treated like any other tenant.

 

Are you buying for investment or as a PPOR? If the later, the property will always be subject to CGT as you haven’t moved in as soon as practicable.

Agree with the others though. Proper process should be followed in any case

 

Another option is to do a licence agreement rather than a lease agreement which may be better if you are planning to move into the place at a particular time.

 

Many thanks all for the great thoughts shared, particularly like this one as it seems to kill two birds with one stone by having someone support me with the pre-settlement inspection

 

No worries mate .. have learnt many lessons over the years and this is one of them!

 

How long do they want to live ?

Always better to get a rental agreement signed through whichever property manager you wish to continue.

In my case, my vendor wanted to live for 3 months. It was not worth it for me. more work during settlement. Although the vendors, kept the house in good condition, during the whole rental agreement signing process, rent amount negotiation, leaving after that 3 months, In their head their behavior was like that they are still the owners of the house rather than tenants.

Once they left after 3 months,I still had to find a new tenant.

 

Did they do anything that was of nuisance or costed you?

Mine is proposing a 14 month lease with a big chunk of the rent to be paid upfront. Still negotiating at the moment but will definitely get a tenancy agreement signed and bond set up.

 

14 months is awesome. I would go ahead with it too and you can disregard what I had written in the previous post

Mine was 3 months, so the extra work was not worth it. It didn't cost me anything extra and they also didn't do any damage, but the extra paper work and dealing with them as tenant for only 3 months was not worth it.

 

Park the rent in advance in your offset account - what happens if they decide to break the lease 2 months in and you have spent the funds or applied them to the loan?

 

That's a good point, I haven't discussed how the rent is going to be transacted but thinking back the last discussion I had with my conveyancer - he sounded like the lump sum will just be netted off the final balance I have to pay at settlement.
Now this got me thinking - if the lump sum rent in advance is netted off my final settlement balance, and parking the savings I have in the offset, are any tax or other implications?

 

Be wary of lump sums. It is assessable income on receipt not across the period of time they have prepaid so if its 6mths plus you will have a tax issue where income vastly exceeds deductions at least in year one. ! It may also need a clause governing non-refundability and may also fail the state requirements for a residential tenancy lease unless special conditions are written. eg Eviction of theyy dont pay more etc. I would be seeking my solicitors specific guidance to the whole matter (not a conveyancer).

 

Hi @Paul@PAS , thanks for this. Just wondering is the 6 months you mentioned a time limit, or a general estimation where usually 6 months rental income will exceed deductions?

Also please correct me if I'm wrong, it will also depend on when I collect the lump sum amount? e.g. if I collect the 6 months rent in advance lumpsum on 1 Jan, then I should have no tax issue as at 30 Jun as the income amount would be the same if I collected over the period?

Are there other ways to handle this rent in advance if I want the security / piece of mind for when the current vendor transition to become my tenant?

I think my lawyer mentioned they will draft an annexure to the standard agreement - will look out for the terms to ensure my interests are protected.

 

I would engage a PM now and ask them to negotiate the rent + terms of the lease. Also be weary if you collect a lump sum directly no PM will want to manage your property for the next however many months they are paid in advance for free so you might be on your own in managing the property.

It is best to ensure all appliances etc are in working order prior to settlement/before you commit to them staying on as tenants - I have had vendors stay on as tenants and request thousands in repairs shortly after settlement

 

Thanks - I'm in the process of discussing this with a PM I've previously worked with so hopefully can work something out.

Sorry to hear and actually this is one of my worry too. However, since I've done the building & pest inspection prior to signing the contract and overall happy with it, not sure if there's much I can do now except for doing a thorough pre-settlement inspection, which even if I identify anything not in working order, I will need to be have proof it was working at contract signing date /have further negotiations anyways whether or not the vendor will become my future tenants? Maybe it will complicate the negotiations?

Were there repairs in your case which you think would not need to be done if your vendors didn't become your tenants?

 

Great OP have started this thread.

We also managed to secure somethingand have nominated PM who is not involved in the transaction, vendor asked for delay settlement after setting the date as not many properties in the market where they want to buy.

We can give 1 week extension but not 2 months, Sales agent asked if we are open for them to rent back. I asked them to allow for my PM to go abd inspect the place and come back with an estimate....market appraisal provided by sales team was around $600pw

If Vendor wants to do month by month does it mean we should aign a lease for minimum 1 month to comply with insurance or will it be considered sjort term rental?

Appreciate any guidance!