Have you ever considered purchasing a tenant-occupied apartment? It’s a fairly common occurrence and there are multiple reasons that an apartment might be tenant-occupied at the point of purchase, including:
New York City is known for its tenant-friendly laws. As such, before getting into contract for an apartment with a tenant in place, you’ll want to consider numerous stipulations related to the tenant that’ll be coming with the property you’re purchasing. Whether you’re looking to purchase an apartment as a primary residence or as an investment property, reviewing these five considerations below are essential to be financially protected in such a transaction.
The first thing that you and your real estate attorney should do is ensure there is a legally binding contract in place between the tenant and the current owner. The contract will need to stipulate important details like the tenant’s name, duration of the contract, the monthly rent and security deposit in escrow.
If there is no contract in place, this is a bad sign, since you may have no paperwork that allows you to efficiently remove the tenant. Additionally, if the tenant has overstayed their welcome, as per the dates agreed upon in the contract, this is also a major red flag. You don’t want to end up in a situation where you already have to file a lawsuit to remove a tenant right after you purchase the property.
If someone tells you something like, “He’s a really nice guy. We did it on a handshake. He always pays his rent. I don’t have any paperwork, though,” that means you should run from the deal.
You’ll want to ensure the current tenant has paid all of their rent and they haven’t withheld any payments. If the tenant owes money or has major late fees assessed to them, this is a sign that the current owner may have had numerous issues collecting rent. To make sure the rent has been paid, the current owner needs to sign a document attesting to this fact in addition to showing copies of the rent checks that have been deposited.
You should not take the current owner’s word for their tenant being great about paying their rent. Request copies of statements and pay stubs. It’s a Catch-22 for new owners that buy apartments with tenants because legally they have to take the tenant too. Prior to signing a sales contract, you’ll want to vet the tenant in the same sort of way that a landlord would. Should you identify some red flags, you can’t demand that the tenant is kicked out, but you can choose to not purchase the property.
In New York City, it’s challenging to find an investment property that creates a positive cash flow. That’s because everyone is investing in property appreciation and is often willing to take somewhat of a monthly loss in return for a higher resale value down the line. When you buy an apartment with a tenant in it, you want to make sure the rent you’re collecting matches your expectations of how much of your monthly costs it will cover. Remember, you may have a mortgage in addition to taxes and common charges. Especially if you’re buying an apartment with a tenant that has a long-term contract in place, you want to make sure you’re not going to be massively in the hole every month, where your expenses are much higher than your rental income.
You might see cheap apartments on the market that attract your attention. They state that they come with a tenant in place, which isn’t necessarily a bad thing. As you read deeper into the description, you see the fine print that states the property is rent-stabilized. Unless you’re seeking a real estate investment that you know how to manage, avoid these properties.
Rent-stabilized and rent-controlled tenants will generally stay in the apartments forever, at which point they’re highly likely to pass them on to a family member. These types of properties were created decades ago to ensure the cost of housing wouldn’t drive people out of the city. These properties can’t easily be converted into market-rent apartments, and the tenants generally have legal protections that allow them to stay in the properties indefinitely, as long as they continue to pay their rent. The rent will be significantly lower than the surrounding market rent, and unless you’re a sophisticated investor who knows how to create more value out of such an asset, I would advise steering clear.
Buying an apartment with a tenant in place can be a great opportunity. However, with every opportunity comes risk. Keep these considerations in mind as you come across these types of listings to ensure that your interests remain fully protected.
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