The success or failure of an investment property can be heavily influenced by the quality of the tenant. In today’s show Michael Yardney, from Metropole Property Strategists, will talk about whether to buy a property with a tenant in place or not.
Kevin: No doubt when you’re buying an investment property, one of the major considerations is the tenant, of course, because without a tenant, there’s no cash flow. But is it best to buy a property with a tenant or one that’s vacant? Let’s get a view on this.
Michael Yardney is from Metropole Property Strategists. That’s a question I’ll put to you, Michael. Would you buy a property with a tenant in it?
Michael: Hi, Kevin. The answer is yes, I would. I like them, but I’m also very cautious about them.
Kevin: Why do you like them particularly?
Michael: We’ve found that a lot of the off-market properties we get offered at Metropole have got tenants in place, because the agents can’t always run a normal marketing campaign. They don’t usually run [0:37 inaudible] campaigns with a tenant in place because a tenant doesn’t make it very easy to get access, and sometimes they’re in such poorly kept conditions that they’re not even prepared to run a normal campaign. If you can see past that, Kevin, you can see the opportunities, there are some good buys out there.
Kevin: What are the things you would look for that would indicate it’s a good buy?
Michael: First of all, tenant or no tenant isn’t the main question. It really is is it the right property in the right location with the right sort of floor plan? All the things we’ve talked about in many of our other conversations have to come into play. But if everything else is right, then I look for the details of the tenant’s lease. Remember, the lease stays on. Even though the ownership changes, you take on any written obligation that the previous owner had, so you have to look at that pretty carefully.
Kevin: Apart from that, do you look at things like how long the tenant’s been there? That’s obviously going to be an indication, maybe, about how long they’re going to stay.
Michael: That’s a really good point, Kevin, because you want them in there long enough to make it feel like home and they’re going to stay. On the other hand, you don’t want them to be in there that long that the previous owners have let the rent slip back and haven’t caught up to date.
I’ve found there are a number of properties where the rent is substantially below market. On the one hand, that’s an advantage, because it may put off other potential investors, but on the other hand, if the tenant isn’t paying the right rent and you increase it, it’s possible you could lose them.
Kevin: Michael, if a property ticks all the boxes and the tenant actually looks good but is simply underpaying, would you still go ahead and maybe look at some sort of a step payment to bring it up to market?
Michael: Kevin, rather than pushing it up in one big lump and losing the tenant, and having a couple of weeks’ vacancy, and having to pay the property manager their normal fee for renting the property, yes, it makes sense to maybe do it over a period of time.
You can come to an arrangement where you increase the rent now, and maybe again in six months, and again in a year’s time, giving them evidence that, “You’re paying below-market rent, but I recognize that you’ve been a good tenant, so I don’t want to disadvantage you.” Definitely make it a win-win for both.
Kevin: If a property is under-performing in that way, is that a poor reflection on the property manager? Should that be an indicator, Michael?
Michael: You don’t know the story. Was it the previous landlord who was scared to push up the rent? Was it the property manager? But remember, you don’t inherit the property manager with the property. Check them out. Make sure they’re going to do a good job for you. If not, you can always swap property managers to somebody you’ve already been working with.
Kevin: When the property does actually change ownership, the agreement with the property manager becomes null and void?
Michael: It depends upon which state you’re in. The property manager has an agreement with the owner, the landlord, and that then gets transferred to the new owner, but it actually isn’t in their name, so you really do have to sign a new agreement.
Kevin: Are there any other additional agreements that you should be aware of that could get you in hot water?
Michael: You should ask about them. You should look for them, because sometimes there has been an agreement by the previous owner to improve the property, to repaint it, to put in new carpets, to do things that if they’re in writing, you may be obliged to follow them up. It’s best to ask those sorts of questions.
Kevin: The bottom line, Michael. What is it?
Michael: Having a tenant in place is nice. It gives you that shorter vacancy upfront. You don’t have to have a vacancy or pay realtor letting fees. But it should not be enough to sway you, but of course, it shouldn’t dissuade you either. The most important thing is to own the right property, because that’s what’s going to be there in the long term. The tenant won’t, Kevin.
Kevin: Michael Yardney is from Metropole Property Strategists. Follow Michael, too, on his very popular blog site, PropertyUpdate.com.au.
Michael, thanks for your time.
Michael: My pleasure, Kevin.