Sure, occupied properties save the trouble of looking for a tenant, and prove up the earning potential for the rental — or do they?
Savvy investors tend to target rental properties that are underperforming. With a little know-how, that property can be turned around quickly, and profitability will soar.
But that can be much harder to accomplish when the property comes with a tenant. Ã‚ Here are a few reasons why:
1. Many investors purchase after researching the potential market rent for the property. If the property is leased at a below market rent with several months to go, then the new owner stays in a holding pattern — there may be little they can do to speed up the higher return on investment.
2. By not choosing their own tenants, the new owner may be looking at hours and dollars spent dealing with someone else’s bad decisions. And if just one of those leases goes to eviction, then costs quickly spike and anticipated profits vanish.
3. The lease itself may not include the legal protections that the new owner will insist on with new tenants. Existing tenants get complacent. Coupled with a weak lease agreement, the new owner may get stuck with a problem tenant and not have the teeth they need to cut their losses.
4. Leasing policies like non-smoking or pet rules can make an enormous difference in profitability over the life of the investment. If the current owner is not maximizing profits, it’s likely because their policies are holding them back. The new owner is typically bound by these policies until the existing leases come up for renewal. Even then, long-term tenants tend to dig in their heels and that means headaches for the new owner.
5. Experienced landlords and managers look for ways to damage-proof a rental so it’s easy to maintain and difficult to damage. It’s much easier to install the new owner’s pick of finishes right out of the gate while the property is vacant then it is to work around the existing tenant — or risk damage to a poorly-prepared property.
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