When working with our investor clients it is common to view houses that have an existing tenant or more. For example, if the home is either a duplex or triplex (2 or 3 units within the house) you are most assuredly inheriting a tenant when you purchase. There are certainly pros and cons to the fact that tenants may be in place upon possession. We will details these essential points for investors who are buying a house with a tenant.
Pros – Tenant:
No Vacancy – Immediate Rental Income
The immediate upside with tenants in the building is that there isn’t a necessity to find tenants for a vacant space. This not only saves new owner/landlord time but also money in the short-term.
Financing
The bank or lender will permit a certain portion of the rental income to be used towards the increased ability to finance the property. A vacant space would be more challenging to get financing approval at a more favourable price point and rate.
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Cons – Tenant:
Rental Rate
As much as it can be great to have a rental income on day one (see “pro” above), if the tenant has been in place for a long period of time it is likely that rental rates are not within the ballpark of current rents. With the spike in Toronto rental values in recent years, this can prove challenging as the rental discrepancy can be large – net the landlord isn’t making the maximum ROI (return on investment) on the property.
Quality Of Tenant
When you inherit a tenant you really don’t know the quality of the tenant. It’s not uncommon for a real estate agent to boast “AAA Tenant” in a listing but we all know that is typically a marketing ploy to sell the house. Like every good tenant you as a landlord you need to know the rules when it comes to dealing with nuisance tenants.
Capital Improvements
When a tenant is in place you cannot make large capital improvements to the space as it would impact their living arrangements. The benefit of making capital improvements is to increase the rent however, you cannot increase rent beyond what is legally permitted in the province of Ontario. We always suggest making capital improvements like kitchen renovations, fridge/stove/dishwasher upgrades, washrooms, painting and other upgrades that can maximize the rents. Remember the increased rents compound in favour of the landlord with the time value of money.
