Buying a tenanted property

[monty python]

Hi all,

I would appreciate some guidance at this early stage - sorry if this is basic stuff!

We have found an IP that we are negotiating to buy. The property has an existing tenant, they have lived there for 6 years and appear to keep the property in very good condition. We are okay with the tenant remaining in the property, and I don't yet know if the lease is current. The rent is below market but we would increase it at the first opportunity.

* How is the transfer of the lease (assuming it's current) effected between the vendor and the buyer (us)?
* How does the sale of the property affect the bond monies?
* Are there any pitfalls we should be aware of and plan for?

We have only ever purchased vacant properties before, but this tenant looks like a keeper (at the right $$!).

Thanks in advance

 

[cadence]

Hi all,

I would appreciate some guidance at this early stage - sorry if this is basic stuff!

We have found an IP that we are negotiating to buy. The property has an existing tenant, they have lived there for 6 years and appear to keep the property in very good condition. We are okay with the tenant remaining in the property, and I don't yet know if the lease is current. The rent is below market but we would increase it at the first opportunity.

* How is the transfer of the lease (assuming it's current) effected between the vendor and the buyer (us)?
* How does the sale of the property affect the bond monies?
* Are there any pitfalls we should be aware of and plan for?

We have only ever purchased vacant properties before, but this tenant looks like a keeper (at the right $$!).

Thanks in advance

If a lease is in place then you will purchase the property subject to the lease, in other words, you automatically take on the existing tenant.

If bond was paid to Rental Board Agency, your property manager will make sure it gets put under your name. You can do it yourself as well. I think it's just a matter of submitting an application notifying change of ownership of property.

If the tenant is on a continuing lease, you can just give them notice to increase the rent. If the tenant is on a fixed lease at fixed rent, you will have to wait until it expires before you can increase the rate.

If you can get them to pay you market rate rent fairly quickly, I don't see any pitfalls, because you get to collect rent the day after settlement, which is a very idea situation.

 

[rugrat]

How much of a gap is there between current rent and market rent?

 

[monty python]

Thank you for the advice, jigglypuff.

The rent is currently $320pw, market rent would be more like $370pw.
Given we would have to pay letting fee and possibly 2 weeks vacant in getting a new tenant, we would increase the rent to $350pw to the existing tenant when possible, then to market rent the following year.
If the tenant decides to vacate, then we would go straight to $370pw for a new tenant. Vacancy rates are very low in this suburb and surrounds.

 

[cadence]

I agree. This sounds more than reasonable.

 

[monty python]

Quick update - the tenant is on an expired lease, our conveyancer has recommended a few courses of action - we have opted to wait until after settlement, take the opportunity to appoint a new PM, get a market rent appraisal and then have the tenant sign a new lease at $20pw discount (60 days notice), or they can give 3 weeks notice and we can get another tenant at full market rent. I dont believe we will have trouble finding a new tenant given the low vacancy rates, and hopefully 3 weeks would be enough time to find a good one.
Seems the easiest way to go really.

 

[cadence]

I wouldn't bother offering them a discount ... but if you are happy to do it ...

 

[Dylan33]

I'm in a similar situation. Do I have to wait the 60 days after settlement to increase the rent if the tenant is on a continuing lease?

 

[monty python]

Hi Dylan,
You can request the landlord (vendor) increases the rent with 60 days notice during the contract period, but they may not want to oblige (they are only required to take reasonable steps...).

Anyway, for us it's now irrelevant as we were GAZUMPED this afternoon. Oh well, we had our solicitor send changes to the contract over on Friday morning but someone came in and made higher offers over the course of today. We're not prepared to chase the price, so we'll find a different house. The contract contained several unequitable clauses (eg vendor can take the deposit monies before settlement ... um, no they can't!) and we're happy we didn't sign subject to cooling off - there's always another house on another day

We are fine about it, no point paying too much, it's not like we want to live there. The painful part is the house inspections that we're going to have to keep going to, blah.

 

[cadence]

MP, that's a very good attitude to have, there will be plenty of other properties for you to choose from! you might end up with something better - sometimes fate plays a part in property investment .... good luck!

 

[cadence]

If you are confident the properties will have good growth in the short/long term, then it should be fine to have as many reasonably negatively geared properties as you can service.

If you are chasing yield, then you might want to incorporate some positively geared properties.