Are Tenanted Properties always a Good Investment?
So what I want to talk about today is whether or not you would consider buying a property that is tenanted and whether that is an advantage or a disadvantage.
At first value, it probably sounds like nirvana isn’t it because it does have some pros. I mean, there is negotiation strength that comes with that. The property market is roughly 70% owner occupiers and 30% tenants or investors. If I take the owner occupiers out of the equation because they don’t want to buy a property that already has a tenant in there for a long time, it means that the pool of buyers is lower and that can give me improved negotiating strength which is what I want. The other thing is it’s seamless. We are buying this property, and from Day 1 we’ve got a tenant in place that is paying us a rent which is just exactly what we want as a property investor. Vacancy is the biggest expense that we would have as a property investor bar none so we would really want to minimise it. It also saves us a lot of time. Vetting tenants and going through the application process takes a bit of time and at then end if you say “Yes” to a tenant and then they go, “Sorry, I’ve already found another one” then you have to repeat the process again. So, it certainly saves us an enormous amount of time if it’s already in place. If you think about the biggest anxiety that any property investor has is the stress that comes from wondering or not they’ll get a tenant in the first place so if it’s already in place, we remove that layer of anxiety.
Now, of course, there are the cons and the first one is, what if you buy a property and it is tenanted but those tenants are substandard? They aren’t actually very good tenants at all. Or what if it’s actually the reason why the current vendor wants to sell that property and you won’t really know that? So that’s definitely a con. The other con is what if there’s no management agreement in place as it was being self-managed by the existing vendor which means that I’ve got to come in and put a property manager in place. That tenant might not actually like that level of accountability because they have had it so good for so long. And I guess, further to that point is what if they’ve been paying under market rent? They’ve been in the property for some time and the current owner just didn’t want to raise the rent because they are happy to keep the tenant. But you as the new buyer, wants to get that rent back up to market value so you can get a good return for that investment dollar. And that is often very difficult to do. The other con to think about is you might actually have an opportunistic tenant. New owner? Here’s a whole new list of things that I want. Fly screen, ceilings fan, I want an air conditioner put in, I want this fixed, and they wouldn’t normally have done that on the previous vendor. Some of those could be legitimate, but if you are an amateur, first-time investor, you might see that list as something that you just got to act on and see costs coming through.
So there are a few questions that you got to ask if you are buying a property that already got a tenant. What is the specifics of the lease agreement? Find out how much they are paying and find out how long the lease actually is. Find out who is the property manager and talk to that them to learn as much as you can about that tenant before committing to that decision. And of course, find out how long has the tenant lived there because that is going to give you an enormous amount of intel on what question you need to ask. And the final question that I really want to know is, has there been lots of turnovers or has it got a history of long term tenants? Because if there is lots of turnovers, that may be an indication that something is wrong with that property and you need to unpack that a little bit further but my conclusion is quite simple. Generally speaking, it’s actually a good thing to buy a property that has a tenant in place but just remember that it is a secondary consideration because the primary consideration still remain. You still got to get the best location and your asset selection is paramount. That’s your primary concerns but if those two things are ticked off and you can find a property that has a tenant in place, that could very well be a good move for you as an investment property.