Firstly and most importantly, the obvious advantage of such a purchase is that the property is tax deductible and receiving rent from day one.
A rental property cannot be claimed as a deduction until the first tenant is in place, after sometimes many dollars having to be spent including the first clean to get the property ready to be tenanted. Lastly, knowing the history of the tenant and the condition of the property, one can make an informed decision if the current tenant is looking after the property.
The downside is if the property has not been looked after, how long will it take to evict the current bad tenant? Are there repairs or improvements that need to be done as these are much harder to organize if a tenant is in situ? A lease that is soon to expire can also be a problem as the current tenant might move out, leaving you short on expected cash flow and back at square one.
As always due diligence is required not only on the purchase of your property, but whether to purchase one tenanted.
Some points to keep in mind if your prospective investment purchase is currently tenanted:
- Review the current lease and understand what is included for your tenant and what your responsibility is. Cash flow is dictated on incoming and outgoing expenditure.
- It goes to say that you should inspect the property beforehand. This will give you a good idea of how the tenant looks after and maintains this property.
- Talk to the managing agent and make sure the tenant is not in arrears and has not been a problem. Find out what sort of person they are as this might save you some grief later.
- Looking at the past maintenance history of a tenanted property can give you some idea of future expenditures.
- Research the current neighbourhood about rental yields. Is your tenant paying too much or not enough? This will give you an indication of what future rental increases could look like.
- Review the last routine inspection report to see if the current agent is looking after the property correctly. This will also indicate if it is a true representation of what you observe.
- Also review the Entry Condition Report. There can be large discrepancies whether years have passed or not and therefore no surprises later on when the tenant vacates.
- Make sure the full bond is in place, sometimes with lease renewals and poor management, the tenant fails to pay the additional top up amounts in line with 4 x weeks rent.
- Remember you don't have to accept the current managing agent as your own, you can change agents/agencies.
- Lastly don't be seduced into buying a property just because it has a tenant. Do your research.