When You Buy a New Rental Property: What Happens to the Current Leases
Posted by Melissa N. on 7th Jun 2023
New rental property owners who want to be landlords will look for properties with a solid rental history and a full list of tenants. If you are buying rental units that have tenants with an existing lease, that lease stays in place when you become the new owner. In a building that's fully rented and has good tenants, the transition to you as the new landlord should be seamless as long as the property is being sold under normal circumstances.
When the Property Is in Foreclosure
One
problem with buying rental units is when you're looking to purchase a
property that's already in foreclosure. Even if the tenants are great,
they are not protected by a lease once the property goes into
foreclosure. You may be able to negotiate with current tenants once the
purchase of the property is accepted, creating new leases for each
tenant and getting your new property full once again. Some tenants may
have a valid lease if they signed one before the previous property owner
got the current mortgage on the property, but this is generally not the
case.
Tenants Are Protected in a Traditional Property Purchase
Tenants in a rental property that you want to purchase will receive a notice from their current landlord regarding the sale of the property. The tenants have the legal right to have their current lease honored by you, the next landlord. This can be a factor when you are looking at a property as the leases may be long and the rent payments too low to make the property profitable. Take a hard look at the profit the property earns each month before buying rental units that aren't going to be turning a profit for years because of bad leases.
Tenants Can Have Varied Leases
The lease agreements signed by the tenants in the property unit can be for a fixed term, such as for a year, month-to-month, or for a fixed term with a special provision. If the tenants within a rental unit are all month-to-month tenants, the new property owner can choose to remove each tenant from the building by giving the proper notice. This is usually 30 days in month-to-month leases. In the event tenants have a fixed-term lease with a special right of termination, each lease terminates when the property is sold to the new landlords.
An investment property isn't worth much if there are no tenants inside. Keeping current tenants who have a solid rental history is generally in the best interest of the new rental property owners. If the sale is a traditional one, current leases will be honored. With month-to-month leases, it may be easier to change rent rates to make the property more profitable. As long as the property is being sold normally and isn't under foreclosure, the new property owner has an obligation to the tenants to honor all existing lease agreements. If the purchase is made through a foreclosure sale, new lease agreements will need to be drawn up for all qualified tenants in the building.
About The Author
Melissa N. has been working as a freelance writer since graduating from college with a BA in English in 1994. She has written many articles for an online website where she has sold articles relating to all aspects of real estate. Article topics in real estate include the basics of a reverse mortgage and real estate trends for 2013.
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