It seems perfect. The nice little turnkey rental property that the current landlord is selling comes complete with tenants. A puzzle perfectly coming together
You’ll buy the property, you won’t have the headaches of doing your own searching for and then screening of tenants. You’ll be ahead of the game from the start and you’ll be making money from day one! What could go wrong?
Well, let me count the ways…
Why Landlords Sell A Tenanted Turnkey Rental Property
There are usually only a few reasons someone sells a turnkey rental property that is ready to go and comes complete with tenants in place.
Some are good, some not so good, and in a few cases downright bad, so let’s run through them.
Reason 1 To Sell A Tenanted Property
Sometimes they’ve reached their goals, they’re ready to retire or move on from being a property investor and now is the time for them to sell. They’ve had great tenants in place and want to make sure they aren’t disrupted and forced to move on.
If that’s the case great this may be a fantastic opportunity. Of course you’ll still need to run all your numbers, base your purchase on it being a smart business decision and not the fact that it’s turnkey.
Remember, just because it’s being sold as a turnkey rental property doesn’t mean it’s actually a turnkey business decision.
It may work for the current owners due to their purchasing it many years prior and buying it at a much lower price point which means lower carrying costs. It may have worked for them as they put down a much larger deposit so the property would cash flow better or they may have even inherited the property and have no mortgage expense.
You don’t always know the entire story and even if you do, you still need to do your diligence to ensure it works for you. With current prices and bigger mortgages the value proposition may have faded turning this perfect property into a potential moneypit.
Reason 2 To Sell A Tenanted Property
With reason 2 we’re starting to get to the potential landmines, so pay close attention.
Often landlords sell their properties complete with tenants because they’re losing money or the property simply isn’t working. These properties may either be a nightmare, or a huge opportunity for an educated landlord!
Many landlords, especially those who jumped into the game without enough knowledge or education, simply don’t understand the business.
They may have underpriced their units, under renovated them so they weren’t getting good rents or they possibly didn’t do the “real math” that experienced Real Estate investors complete to evaluate a property.
Years ago I wrote an article that explained “actual cashflow” versus what rookie landlords often see as cashflow. If you’re not familiar with it you can find it here, Do You Really Understand Cashflow?
The monthly cash flow and returns they anticipated simply evaporate as their inexperience with screening and managing tenants and their ongoing maintenance costs eat all their expected cash flow up.
These types of properties can provide a great opportunity for the smart investor willing to sink a bit of additional time and money to turn a property around. So you can’t count them out entirely.
Of course these also end up being not quite as turnkey as advertised so you need to balance that out as well!
Reason 3 To Sell a Tenanted Property
Now we’re moving to the danger zone. Sometimes a landlord ends up selling a tenanted “turnkey rental property” because the tenant (or the property) is a nightmare and the turnkey opportunity isn’t quite as advertised.
They’re just trying to get out and pass the problem on to someone else. Don’t let it be you!
Some of the warning signs with this could be simple items like paperwork that can’t be tracked down (like missing or non-existent leases or lack of validated expenses ), not being able to talk to the current tenants (owner doesn’t want you to hear the real story) or a list of excuses about the condition of the property (lack of funds for repairs due to lack of payment?).
As in reason 2, there may still be an opportunity to turn this property around and turn it into a profitable solid long term rental property investment. It will simply require more diligence and/or immediate gains.
For a quick gain, you’d simply want to be compensated in some manner in order to assume or negate the previous landlords problems. This could be a better price, rephrased terms where you get the property vacant or other options.
For your diligence you’ll want all the possible paperwork and in the case of any suited properties all documentation verifying the legality of the unit.
There’s nothing more exciting for a landlord than assuming the property is legally suited to find out the reason the landlord is selling is due to the city inspecting the property and shutting down the second rental unit you were counting on.
Maybe exciting is the wrong word, frustrating perhaps?
It’s Not All Bad
Now, it may appear I’m saying never buy a turnkey rental property, but that’s not exactly true.
What I’m trying to point out is it’s important to get all the details, not just what the current property owner tells you.
It’s important to get all the documentation available, like leases, tenant walk throughs, amendments to the leases or special exceptions (allowed to sublet, pets, agreements for late rent payments or other allowances outside the actual lease). You’ll also want copies of receipts of any security deposits.
You’ll want to meet with the tenants to make sure thee aren’t any problems or issues and obviously you’ll want a thorough property inspection. You just can’t leave anything to chance!
So, should you buy a property that comes with tenants? Well that comes down to what you find out with all your diligence!
What are your thoughts?
Have you bought a turnkey rental property? And did it work for you? Leave me a comment below and let me know.