The Australian property market provides many opportunities for investors. One common investment option is purchasing a residential property that already has tenants in place.
Buying a property with existing tenants can be attractive because it allows the purchaser to receive rental income immediately after settlement. However, these properties also come with important legal and practical considerations.
Before purchasing a residential property with tenants, buyers should understand vacant possession, existing lease agreements, tenant rights, and their responsibilities as a new landlord.
This article explains what buyers should consider when purchasing a property with existing tenants, including lease terms, tenant assessments, and post-purchase options.
Vacant Possession vs Existing Tenancies
When purchasing a residential property, it is important to understand whether the property is being sold with “vacant possession” or “subject to existing tenancies”.
| Purchase Type | What It Means |
|---|---|
| Vacant possession | The property is sold without tenants. The purchaser can move in, renovate, or lease the property as they choose. |
| Subject to existing tenancies | The purchaser inherits the current lease agreement and becomes responsible for managing the existing tenancy. |
Buying With Vacant Possession
Purchasing a property with vacant possession gives the buyer greater flexibility.
The new owner can move into the property, carry out renovations, or find new tenants without needing to consider an existing lease agreement.
This option may suit buyers who intend to live in the property or make significant improvements after settlement.
Buying Subject to Existing Tenancies
When a buyer purchases a property with existing tenants, they inherit the current lease agreement and its terms.
This option can be attractive for investors because rental income continues immediately after settlement.
However, the buyer must also accept the existing tenant arrangements and comply with their legal obligations as a landlord.
Types of Residential Tenancies
Residential leases can take different forms. The type of tenancy affects the rights and obligations of both landlords and tenants.
- Fixed-term lease: A lease for a specific period, such as six months, one year, or two years.
- Periodic lease: A tenancy that continues on an ongoing basis, usually month-to-month, after the fixed term expires.
The type of tenancy will affect the notice requirements if the new owner wants to end the lease.
Ending an Existing Lease After Purchase
If a property has an existing fixed-term lease, the purchaser may need to wait until the lease ends before taking possession for personal use.
An early termination clause may allow the lease to end earlier, depending on the agreement.
Even when a fixed-term lease expires, landlords must provide tenants with the required notice under the applicable tenancy laws.
In New South Wales, landlords should refer to the requirements under the Residential Tenancies Act 2010 (NSW) and guidance from NSW Government renting information.
For example, the minimum notice period for a landlord ending a periodic lease without a specific reason in NSW is generally 90 days. If a tenant wants to end a periodic lease, the notice period is generally 21 days.
Due Diligence Before Buying a Property With Tenants
Before purchasing a residential property with existing tenants, buyers should complete thorough due diligence.
The contract of sale should clearly state whether the property is being sold with vacant possession or subject to existing tenancies.
If a tenancy exists, the contract should include a copy of the lease agreement.
Important Lease Terms to Review
When reviewing the lease, buyers should pay close attention to:
- The length of the lease;
- The current rental amount;
- Termination provisions;
- The security deposit or bond arrangements;
- Special conditions within the agreement; and
- Any restrictions affecting the tenant’s use of the property.
| Check Before Buying | Why It Matters |
|---|---|
| Lease agreement | Shows the tenant’s rights and the landlord’s obligations. |
| Rental amount | Helps determine the investment return. |
| Lease expiry date | Shows when possession may become available. |
| Special conditions | Identifies additional obligations or restrictions. |
Assessing Existing Tenants Before Purchase
When purchasing a property with tenants, buyers should consider whether they are comfortable continuing the existing tenancy.
If the tenants are reliable and maintain the property, keeping them in place may provide immediate rental income and reduce vacancy periods.
However, concerns about the tenants may affect whether the investment is suitable, even if the property itself appears ideal.
Tenant Payment History
Buyers should ask the seller or property agent for information about the tenant’s rental payment history.
A history of unpaid rent or repeated rental arrears may indicate potential risks with the investment.
Tenant Conduct and Property Care
Buyers should also consider whether the tenants have complied with the lease agreement.
This may include checking whether they:
- Follow restrictions on subletting;
- Seek approval before making property alterations;
- Maintain the property appropriately; and
- Communicate effectively with the landlord or agent.
Good communication between landlords and tenants can make future negotiations and property management much easier.
Frequently Asked Questions About Buying a Property With Tenants
Can you buy a property with tenants already living there?
Yes. A buyer can purchase a residential property with existing tenants. However, the buyer usually takes over the existing lease agreement and becomes responsible for the landlord obligations.
Can I move into a property after buying it with tenants?
It depends on the type of tenancy and the requirements for ending the lease. Buyers must follow the relevant notice requirements before asking tenants to leave.
Should I review the lease before buying a tenanted property?
Yes. Reviewing the lease helps buyers understand rental income, tenant obligations, lease expiry dates, and any special conditions.
Are tenants protected when a property is sold?
Yes. A sale does not automatically end a tenancy. New owners must comply with tenancy laws and respect the tenant’s existing rights.
Conclusion
Purchasing a residential property with existing tenants in New South Wales can provide immediate rental income, but buyers must carefully consider the legal and practical implications.
Understanding the lease agreement, assessing the existing tenants, and confirming landlord obligations are essential steps before proceeding with the purchase.
Whether you plan to keep the tenants or move into the property, you must comply with your obligations as a landlord and follow the required notice processes if ending the tenancy.
Obtaining advice from a property lawyer or experienced real estate professional can help ensure a smooth transition and reduce potential risks.
This article provides general information only. 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].