Investment Property with an Existing Tenant: Pros and Cons

Last Updated on 11 February 2024 by Ryan Oldnall

If you’re an investor looking to purchase a property, one question you may have is whether you should buy a property that already has a tenant in place.

While there’s no one-size-fits-all answer to this question, there are both pros and cons to consider. In this article, we’ll explore the advantages and disadvantages of purchasing an investment property with an existing tenant.

Pros of buying an investment property with an existing tenant:

1.Instant income: Buying a property with a tenant already in place means you’ll start receiving rental income from day one. This can be especially appealing to investors who want a guaranteed income stream.

2. No vacancy down time: If you buy a property that is already tenanted, you won’t have to worry about finding a new tenant or dealing with any vacancy down time. This can save you both time and money.

3. Avoid property management listing fees: If you purchase a property with an existing tenant, you won’t have to pay property management listing fees, which can be significant.

These fees can include 2+ weeks’ worth of rent, as well as other costs like listing on popular property websites like realestate.com.au and domain.com.au, and photography fees.

Cons of buying an investment property with an existing tenant:

1. Below-market rental income: The current tenant may be paying rent below the market value, which means the previous landlord chose not to keep up with current rental rates.

This is important to factor into any potential purchase, as you may have to wait until the current lease agreement ends before renegotiating the rental amount.

2. Limited ability to increase rent: If a rental increase or renewal has taken place in the previous 12 months, you won’t be able to increase the tenant’s rent upon taking ownership of the property.

You’ll need to wait for the individual tenancy agreement to run its course before renegotiating with the tenant or having the property vacated.

Do you need to honour an existing rental lease?

Whether you need to honour an existing rental lease largely depends on the nature of the lease agreement. If the tenant is on a fixed-term agreement, you’ll need to honour the lease until it expires.

Alternatively, if the property is on a periodic lease, you can make it a condition of the sale that the property be vacant upon possession.

Can you hire your own property manager if one is already in place?

Absolutely! When you take ownership of the property, you’re under no obligation to retain the services of the existing property manager. Your preferred property management organization can liaise with the existing property manager to organize a handover upon settlement of the property.

In conclusion, buying an investment property with an existing tenant can offer both advantages and disadvantages. It’s essential to conduct thorough market research, analyse the rental history and lease agreement, and consider the pros and cons carefully before making a final decision.