How to handle inherited tenants with your new rental property

Finding and purchasing a rental property is stressful!  Consider now that it often comes with current tenants already in place, otherwise known as “inherited tenants.”  These tenants can make that purchase either really great or seriously disruptive.    While ideally, you would love to start with tenants you have screened and vetted yourself, unfortunately, you must honor the terms of their existing lease with the previous owner until expiration.  So how do you handle the inherited tenants that came with your new rental property?

This guide will help you evaluate these inherited tenants before placing an offer, during due diligence, and know what’s important to do with these new tenants after the purchase.

Before You Put An Offer On the Property

Typically, upon request, a seller or their broker representative will provide a disclosure package to prospective buyers to show the basic information that will help determine if the property is worth moving forward with an offer.

The disclosure packet usually contains:

• Copies of unit mix
• Rent Roll
• Financial Statements

If the numbers seem to work with your requirements after you review the rent roll and financials, you can ask for copies of the leases.  The seller does not have to provide these.  However, if they have nothing to hide and you have proven you are a serious buyer, they should concede and provide the leases.  Please keep in mind tenant names will be blacked out to preserve their privacy.

Review Existing Leases

Getting accurate information regarding the occupied property and the tenants is vital and should be a priority even before making an offer.  In addition, when buying an investment property, you are responsible for taking over its existing leases.  Therefore, the purchaser must become familiar with all the conditions of the leases.

When reviewing the leases, you are evaluating the following items:

• Confirming the lease amount matches what the Rent Roll states
• Lease terms. Month to month or when the lease end dates are
• Security deposit amount
• The number of occupants listed on the lease
• Who is responsible for what utilities and expenses
• Special terms of the lease (i.e., rent discounts for work performed)
• Special addendums (pet, smoking, landscaping, special arrangements between owner and tenant, etc.)

Should you find that all of the terms of the lease fit with your business model, move ahead and make an offer.

Performing Due Diligence After Your Accepted Offer

Now the fun begins.  Once the offer is accepted, the buyer needs to perform their Due Diligence, or in simpler terms, an investigation of the current owner’s property, tenants, and business practices.  Along with physical inspection reports and appraisals, the buyer will want to obtain an Estoppel Certificate to gain confirmation from the tenant of the status of the existing lease.  This is the primary way to confirm your inherited tenants and their leases will work with your new rental property.

Estoppel Certificate

An Estoppel Certificate is an easy, usually one-page, form the existing renter fills out, giving you the conditions of their rental agreement to the very best of their knowledge.  An Estoppel Certificate is a legally binding document whereby a tenant represents or promises certain things regarding its lease or rental agreement to be true.  Therefore, confirming the rental agreement details with every tenant before buying the property is crucial.

The purpose of an Estoppel Certificate is usually twofold:

(1) to give a prospective purchaser accurate information about the lease and the leased premises

(2) to give assurance to the purchaser that the tenant, at a later date, will not make claims that are inconsistent with the statements contained in the estoppel certificate.

If the property owner does not provide you with the Estoppel Certificate, you can request to collect them yourself.  This will allow you to set up an appointment and meet each tenant, one on one.  Should the property owner not enable you to interview the tenants and receive an Estoppel Certificate, that could be a red flag, and they may be attempting to conceal something.   This situation is relatively rare though.

An Estoppel Certificate should include at a minimum:

• All tenant and occupant names
• Lease terms, including start and end date
• Rent amount and due date
• Security deposit amount
• Utility arrangement (who pays, etc.)
• Appliances (who owns them, etc.)
• Pet addendum information, if applicable (additional rent or security deposit paid for the pet, limitations on pet size or breed)
• Current maintenance list, if applicable
• Any other addendums (i.e., no smoking)

Evaluating Inherited Tenants

The current tenants will probably be aware of an impending change in ownership.  One way to get started on the right foot is good communication.  Besides the stress you feel with the purchase of rental property, your potential inherited tenants also feel uneasy, mainly from the fear of the unknown.  Remember, if you buy a property with existing tenants, the property is an investment, but it is also the tenant’s current home.  When asking them to fill out the Estoppel Certificate, maybe let them know about a few of the improvements you are considering making to the property.  Speaking directly with the tenants can give you detailed information about how well (or not) the rental unit is currently being managed.

After Purchasing the New Rental Property

Once you have purchased the property, deliver a change of management notice to the tenant.  This document informs the inherited tenant about new contact info, where to pay the rent, and how to report maintenance issues.  Convey to them that you are a person who takes pride in your rental properties.  Let them know communication is vital to you.  Tell them that your job is to ensure that the property is in good condition moving forward and that your tenants have a safe, clean, and quiet place they can call home.

TIP:  Never agree or speak in a manner that makes them feel like you will keep them on as tenants.  Should their lease expire and they do not meet your rental criteria, you have the right not to renew their lease (except in some rent-controlled areas).  Keep your conversation neutral, businesslike, and explain you will be re-evaluating each tenant before signing new leases.  This is what you have to do with inherited tenants and your new rental property.

Renewing Leases of Inherited Tenants

If their lease is month to month or expired, it is good to have inherited tenants fill out your standard application and screen them as you would a prospective new tenant.  You should already have your policies and standards set.  For help with this, download our FREE 10-page Guide on Placing Your Ideal Tenant.

Legally, you must honor the conditions of the existing leases.  You may not like those conditions, but you are lawfully bound to abide by the lease until the expiration date.  However, if the tenant agrees, you can ask them to sign an updated lease with you before their previous lease ends.  Your new lease would replace their old lease, making it null and void.

Additionally, to remove an unwanted tenant, you can use the concept of “Cash for Keys.”  If their lease does not expire for some time and you have found they have violated the lease significantly, you can approach them and offer them a set amount to move out.  Typically, this amount is enough funds to cover moving expenses, a security deposit on another rental, and a little extra for the inconvenience you are causing.  If they decline, you can explain the offer is instead of the costly eviction process, which you will proceed with given the lease violations.

If their lease expires in 90 days or less, give the proper legal notice that you will be ending their tenancy.  Be mindful of whether your rent-controlled state allows this.  If not, use the cash for keys concept to remove them.

Rent Increases

The best-case scenario is if a current tenant meets all your qualifications, and you want to continue to have them as a tenant.  If there is going to be a rent increase, be sure that the property maintenance is current, the increase is reasonable, proper notice is given, and all lines of communication are open.

You will need to have rents at or near the market rate to make your investment work.  Depending on what you find in the financials and Estoppel Certificates, you might have to increase your tenant’s rent.  Communicate that rent has been significantly under market over the past few years.  You could give examples of similar units in the neighborhood and the asking rents.

TIP: When raising rents, keep them just below the market rate.  Why?  When your tenant researches moving, they’ll find other rentals cost more, and the hassle of moving is not worth it.

Do you raise rents immediately, or is it better to do it over time?  Once again, communicate with your tenants.  Tell them the fact they probably already know; rent is below market.  Be upfront and honest with your inherited tenants if the units are under market value.  Advise them the rental rate will be increasing and what improvements you have planned for the property.

If you’d like to keep a tenant who has met your qualifications, you could offer them an incremental rent increase.  Work in the lease increases every three months or so.  As a sign of good faith, offer them something so they feel like they are getting a deal in return.  Buy them a new refrigerator, replace carpet, paint a room, or offer something to add value to the unit.

To learn more about raising rents, read How to Raise Rents Without Sacrificing Tenants

Final Thoughts

Ultimately, the goal of every landlord is to fill every unit with excellent tenants.   The risk of inherited tenants with your new rental property is that you, the new landlord, didn’t select them.  On the other hand, you could inherit some excellent tenants who want to stay long.  Communication is always the key.  Starting your relationship with inherited tenants will significantly depend on your ability to communicate clearly and openly.  The more they know, like, and trust you, the higher chance of a smooth transition and welcome outcome for everyone.

Check out our other blogs to guide you on your self-management journey as a landlord:

5 Spring Maintenance Items To Do For Your Rental Property

How To Improve Tenant Relations

Security Deposits: 5 Tips Landlords Should Know

Meet Stacie & Kevin, Your Landlord Resource

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