Investing in real estate can be very exciting and challenging at the same time. It is a business that has huge highs and lows. It can be thrilling, but it can also be difficult to navigate. This emotional roller coaster often takes you down paths that you could have never anticipated. Riding out the highs and lows is part of the investment game, however, being an educated and engaged investor can make or break your cash flow within the first few months of ownership. In order to avoid starting down the wrong path, take into consideration these 5 simple rules when purchasing an occupied property.
One area that puts you at risk of losing money quickly is purchasing an occupied investment property. The general concept of purchasing this type of property is that if the numbers work on paper then the deal will work in real life. Unfortunately, my experience has shown that this way of thinking can be detrimental to the long term success of your investment. If I had a quarter for every time an investor told me that it works on paper, I would be rich!!!
There are many pitfalls when purchasing an occupied property. The keys to avoiding these mistakes are simple. Taking shortcuts and not doing your research can cause huge headaches and loss of cash flow, not only for you but also your property manager. It is easy to put the blame on the property manager if a property isn’t performing. However, a large part of the responsibility in ensuring that your investments are profitable falls on you. There are several areas that you need to thoroughly investigate prior to purchasing an occupied property, but not all of the areas affect the outcome of your investment the same.
From my 18 years of property management experience, I have compiled a list of 5 rules that I encourage every investor to follow in order to help ensure the success of their portfolio. As stated above these are not the only areas that need focus, but by following these 5 rules you will increase your chances of success!
1. Read the Lease!
Reading the existing lease prior to closing is a step that is often overlooked. You as the owner will be held responsible for upholding the current lease. So it only makes sense that if you are going to be held responsible for it, you understand it. This may seem like common sense, but it is truly surprising the number of owners I work with who don’t know what they are responsible for. Who pays utilities, takes care of lawn care/snow removal, any existing maintenance requests, and when does the current lease end? These are all important questions you need to know when purchasing an occupied property, to prevent a loss of monthly cash flow. If there is not a current lease in place, it is best to check with an attorney prior to closing to find out how long would it potentially take to gain possession of the home if needed. Several months of fighting an eviction are costly and can immediately set the property up to take a large loss.
2. Tenant Contact Information
Communication with the current tenants is critical for a seamless transition between new and old ownership. If the tenants are currently in a lease it is best to communicate with them throughout the entire purchase process. Tenants want to know the sale of the home is not going to disrupt their entire lives. In order for this communication to take place, it is important to gather the contact information for all tenants on the lease. It is ideal in these situations for communication to be in writing, this ensures you have documentation of all conversations. Tenants may not be welcoming of this change and their viewpoint can quickly turn sour due to lack of communication.
3. Security Deposit Information
When purchasing an occupied property it is easy to overlook the importance of not only reading the lease but making sure everything stated in the lease is transferred. That is where it is necessary for you to be engaged and educated. Not clarifying any lease questions could potentially lead to a loss of cash flow. The lease should clearly state if the tenant has paid a security deposit. If the deposit is listed in the lease, whoever owns the property when the tenants moves out is responsible for refunding it. If a deposit is not accounted for at closing you will be responsible for refunding the full amount, out of pocket.
Working keys to all exterior doors is one of the main rules the majority of owners break. Again, it seems so simple, but many out of state investors rely on their realtor to provide working keys to the property. The keys are normally the last item to get transferred, so it is easy to assume the keys work and move on. Making this assumption without checking can lead to thousands of dollars in potential damage due to not having access to the property in case of an emergency. It is always better to complete all due diligence up front than to just assume it was taken care of by someone else.
5. Move In Paperwork
Collecting all move in condition paperwork for the existing tenants can make a crucial impact when they do decide to vacate. The move in paperwork should include an original application for occupancy and documentation of move in condition. Prior to being approved, tenants should have submitted an application
containing their birthdate and social security number. Without this information, it will be impossible to file a collection on a tenant for loss of rent or damages. The courts also need this information in order to file a judgment. If you do not have these items at the time of closing, it is highly encouraged for you to reach out to the current tenants in order to collect it immediately.
When a tenant takes possession of a home it is standard practice to document the move in condition. This is done in order to charge for any damages that occur while the tenants were living in the home. A move in condition report can be done in many different ways. The most effective way is to take time/date stamped photos or video. In order for this documentation to be used in court, it is beneficial to have the tenant and landlord/owner sign off on the condition report. If for any reason the move in condition of the home was not documented, it becomes nearly impossible to deduct charges for damages from the deposit. We have experienced many situations where a life-changing event happens to a tenant who was once reliable then turns into an eviction case quickly. In these instances, tenants tend to not maintain the property and cause additional damage. Without a signed move-in condition report the owner could be left with thousands of dollars worth of damage and no recourse to recoup those losses.
Following these 5 rules does not guarantee a successful investment, but it will ensure a higher rate of success!