Closing on a newly acquired property? Great.
An occupied property? Oh.
When the property you buy as a real estate investor is occupied by tenants, you’re in a pretty strong position in that you already have income that you’ll earn on day one of ownership. The challenge, of course, is that you’re walking into a landlord and tenant relationship that predates you as an owner.
Closing on an occupied property comes with a few unique challenges, and we want to make sure you’re prepared for them. We’re providing a checklist that will help you and the seller and your tenants have a stress-free and simplified experience as ownership transitions and you gain not only a new rental home, but a new tenant as well.
Occupied Investment Properties Need Special Attention at Closing
When you buy a property that already has tenants in it, you’re getting more than real estate. You’re also getting people. These are people who think of your new asset as their home. It’s a personal relationship that exists outside of the relationship you will have with that property.
With that relationship comes expectations, a lease agreement, a history of rental payments, and the uncertainty of whether the previous owner had a good or not-so-good relationship with those tenants.
These complexities make it essential for investors to understand the current rental situation and to work with a property manager to not only get through the closing process, but to ensure there’s a rental experience that is positive for the tenants and profitable for you as the new owner.
The closing process should be discussed with the seller ahead of time as well as your agent and property manager. A little extra attention to detail is needed, and the more prepared you are, the smoother the process will be.
Closing Checklist for Occupied Rental Properties
This is the checklist we recommend you follow. We know that each closing will be different and there’s no single way to do things. But, these are the things that you can expect at nearly every closing that involves tenants and occupied properties.
- Inspect and Perform Due Diligence on Existing Leases
Before the closing date arrives, take a close look at all lease agreements and tenant records. Verify the lease term so you know when renewals or turnovers are coming up. It’s important to know how long you can expect tenants to be in place at the property you’re buying. You want to evaluate the existing rental rates, too. How much rent is coming in monthly? Is this a property that falls under the statewide rent stabilization laws? Understanding existing rent allows you to evaluate the potential return on investment (ROI).
Consider tenant payment history while you’re looking at rent. Look for late fees and outstanding balances. Are there tenants with a history of late payments? Know what to expect. Review what’s included in the rental payment or outside of it. The lease will tell you what you’re responsible for as the new property owner. Are utilities, maintenance, or landscaping services included in the rent?
- Verify Tenant Occupancy and Documentation
Who is living in the property you’re buying? Verify every occupant. It’s okay to request proper identification and lease agreements along with any applications filled out during move-in. It’s important that you don’t overlook these documents—it helps safeguard against any disputes or “phantom tenants” after closing.
- Understand Tenant Rights and Laws in California
Hopefully, you have some experience renting out homes in California. The laws here are strict, and if you’re new to this, you’ll want to familiarize yourself with laws around fair housing, habitability, security deposits, and evictions. These laws will help you understand your role, rights, and obligations once you close on the property. Your property manager can be invaluable here, especially when it comes to compliance with all landlord-tenant laws.
- Plan for Communication With Current Tenants
Transparency is going to help you establish a good relationship when inheriting rental property occupants. During the closing period, outline a plan to introduce yourself as the new owner or landlord. You may want to meet in person or send a welcome letter to tenants explaining the change. It’s a good opportunity to introduce yourself and assure them that nothing will change right away. Share information regarding how to address rent payments, maintenance requests, and other communication.
- Arrange a Property Walkthrough Before Closing
Schedule a walkthrough of the property with the seller to inspect the property. Pay close attention to any signs of damage or disrepair. You especially want to be sure that the property complies with local safety and habitability codes. This inspection ensures you have a comprehensive understanding of the property’s current condition and any potential repairs post-purchase.
- Negotiate Security Deposits
When a California rental property is sold, the outgoing landlord must either transfer the tenant’s security deposit to the new owner or return it to the tenant, along with an itemized statement of any deductions. Talk to the seller about how this is expected to happen and make sure you’re on board with any security deposit terms that are in place through the lease agreement.
- Work With Experienced Professionals
Closing on occupied properties requires specific expertise. Partner with professionals who specialize in real estate transactions involving tenants for a seamless experience. As property managers and real estate experts, we have the landlord and tenant knowledge to help you through this process. You’ll find it’s less stressful for everyone when you work with an experienced management team.
Closing successfully on tenant-occupied properties protects you from any potential legal risks and sets you up for financial success. A smooth transition shows tenants that you’re a responsible investor, which is key to ensuring consistent rental income and lease renewals.
Whether you’re looking to buy an occupied property or you’ve found the right opportunity and you need help navigating the process, we’re here to help. Contact us at Action Properties, and we’ll expertly help you move through the closing process and the leasing, management, and maintenance parts of owning a rental property.
