The Australian real estate market offers an array of opportunities for investment. A common type of real estate investment is residential property with existing tenants. This can be an appealing option for various reasons, including the benefit of receiving rental income immediately after purchase. However, these types of properties also come with their own set of considerations.
In this article, we will explore the nuances of buying a residential property with existing tenants from understanding vacant possession to evaluating lease agreements, assessing existing tenants, and determining your post-purchase intentions.
Terminology
When considering the purchase of a residential property, it is essential to understand whether you are acquiring it with ‘vacant possession’ or ‘subject to existing tenancies’. Acquiring a property with vacant possession offers you the flexibility to immediately move in, renovate, or lease it as you see fit. This is obviously an attractive option if you plan to live in the property or wish to move forward with significant renovations.
Buying a property subject to existing tenancies, by contrast, means that you will inherit the current lease agreement, including its terms and conditions. This may be appealing if you are seeking an investment, as the rental income will immediately begin to generate income from the rental payments.
Type of Tenancy
Of course, tenancies come in different forms, from a fixed-term lease (for example 6 months, 1 year, 2 years) to a periodic lease where no fixed term is specified (or the fixed term has expired) and the lease renews automatically on an ongoing month-to-month basis. The type of lease impacts the notice requirements for ending the lease.
If a property is subject to an existing fixed-term lease, you may need to wait until the lease term expires before taking possession for personal use, unless there is an early termination clause in the lease. Even when the term comes to an end, you will still need to provide the tenants with proper notice, in accordance with the lease or governing law, well in advance of the lease’s end date.
The minimum notice required for a landlord to end a periodic lease in New South Wales without a reason is 90 days. Note, if the tenant wishes to end a periodic lease, the notice period is 21 days.
Prior to Buying
Prior to buying a property, you must perform your due diligence. First, the contract of sale should clearly specify whether the property is being sold with vacant possession or subject to existing tenancies. If there is a tenancy, a copy of the lease should be included as part of the contract. When reviewing the lease, you should pay particular attention to terms such as the lease duration, rental amount, termination provisions, security deposit, and any special conditions.
Evaluating Existing Tenants
When buying a property subject to an existing tenancy, it is an important step to assess whether you are comfortable entering into a business agreement with the current tenants. If the tenants are reliable, you may choose to keep them in place and enjoy the benefits of immediate rental income. In contrast, if you are not comfortable with the existing tenants, this may be sufficient to discourage the entire investment, even if the property is otherwise ideal.
When assessing the existing tenants, you can ask the seller (or the property agent) for information about the tenant’s payment history to ensure they are consistently meeting their rental obligations. A past issue with rent arrears is a red flag that may indicate this is a bad investment.
You can also verify whether the tenants have adhered to the other terms of the lease agreement, including any restrictions on subletting or property alterations and whether they have looked after the property. Finally, you can consider the overall ease of communication with the tenants, as good communication can simplify the process of future negotiations.
Conclusion
Purchasing a residential property with existing tenants in New South Wales offers both financial advantages and unique challenges. A clear understanding of the terms of the lease and the nature of the existing tenants is vital to determine whether to proceed with the transaction.
Whether you decide to retain the existing tenants for rental income or to move into the property, it is essential to comply with your obligations as a landlord and the legislated notice requirements if terminating the lease. Engaging with a real estate professional and/or legal advisor experienced in property transactions can provide valuable guidance and ensure a smooth transition.
This is general information only, and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please contact us on (02) 9818 2888 or email [email protected].