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Avoid Common Mistakes when Closing on Tenant-Occupied Properties
Investing in real estate can be an exciting venture, but it also comes with its fair share of challenges. One crucial aspect of managing investment properties is the process of on-boarding new properties and tenants. In this blog post, we will share three essential pieces of advice to help you navigate this process smoothly and efficiently.
Don’t be afraid of in-place tenants
First, don’t be afraid of in-place tenants paying below market rent. While it may seem like a disadvantage initially, you have the opportunity to gradually increase the rent over time. If the tenants have existing leases, you can raise the rent at the end of the lease term. Be sure to review the lease agreements for notice dates, as they vary. In cases where there isn’t a written lease, the implied notice period is generally 30 days in Pennsylvania.
When it’s time to increase the rent, it’s important to communicate openly and transparently with the tenants. Give them plenty of notice, and time to make other plans if they can’t accommodate the rent increase. Let them know that you intend to put them on a new lease agreement with a rent increase, to bring their rent closer to the market rate. If they agree to the increase, proceed to sign the new lease. If they don’t agree, provide them with the required notice according to the lease terms of their in-place lease.
If the property has multiple units, strategize how you phase the rent increases to avoid simultaneous vacancies. You may have capacity to refurbish only one unit at a time, so phase your rent increases to improve your chances of having only one vacant. It’s also a good idea to stagger your leases so they don’t all end at the same time.
Ask the seller for key documents
Second, ask the seller for the things you need to manage existing tenants properly. It’s essential to have access to key information and documentation. Request the following items from the previous owner or property manager:
- Tenant contact information and keys: Ensure you will be able to communicate with the existing tenants and also have lease-compliant access to the property.
- Copies of leases: Review the existing lease agreements to understand the terms and obligations.
- Tenant ledgers: Obtain records of rent payments, late fees, and any outstanding balances. If they don’t have ledgers, ask for proof of payments and the dates they’ve been paid, to see if the tenants are paying consistently and on-time.
- Condition reports and move-in documents: Gather documentation detailing the property’s condition at the time each tenant moved in. This will help you assess any damages or repairs needed, and will help you to disposition the security deposit when a tenant moves out.
- Security deposits: Ensure that security deposits are transferred to you. Security deposits are tenant money held by the landlord as protection against potential tenant damages. If you don’t get this money from the prior owner, you will still owe it to the tenants at the end of their lease terms.
- Clear understanding of utility handling: Clarify how utilities are currently managed and billed to avoid confusion or disruptions in service. Sometimes this is clear from the leases, but sometimes it is not.
By having these essential documents and information at your disposal, you can establish a strong foundation for managing the property effectively.
Coordinate closing mid-month
Third, a mid-month close is easier than a month-end close.
When finalizing the purchase of an investment property, consider opting for a mid-month closing date rather than a month-end closing. While it may seem like a small detail, this choice can greatly simplify the transition process.
With a mid-month closing, the prepaid rent is pro-rated and exchanged at closing. It is a simple calculation and is just one of several other pro-rations involved in the closing process.
In contrast, a month-end closing can lead to confusion for tenants regarding rent payment. You would need to communicate immediately with each tenant to inform them where to pay their rent. If the tenants have already prepaid the prior owner, it adds complexity to the situation. Communication with tenants becomes challenging until the closing is complete, causing unnecessary stress. By opting for a mid-month close, you buy yourself some time to effectively communicate with tenants and avoid such complications.
Successfully on-boarding new investment properties requires careful consideration and proactive management. By following the advice provided in this blog post, you can navigate the process with confidence and ease! If you’d like the support and assistance of a professional property management partner, you can learn more about our property management services from our Website.
Frequently Asked Questions
- Are there any specific legal considerations or regulations to be aware of when increasing rent for tenants in Pennsylvania, especially if they already have existing leases in place?Answer: read the leases! The existing leases will include notice periods for rent increases and for lease non-renewals. If there is an existing longer-term lease in place, coordinate a rent increase coupled with a notice to vacate if a new lease is not signed by the end date of the original lease. If the leases are silent on this matter and/or if the leases are month-to-month, we find it to be best to provide 60 days notice of a rent increase, coupled with a notice to vacate at the end of the term coincident with 60 days. Be careful, sometimes lease language will stipulate a longer, 90-day notice period. Read the lease. Additionally, Pennsylvania does not have any rent control laws but municipalities are allowed to establish rent controls. Check the local municipality’s codes. And of course rent cannot be raised in retaliation or for discriminatory reasons (non-compliance with the Fair Housing Act).
- How can I ensure a smooth transition of security deposits from the previous owner to myself when closing on a tenant-occupied property?Answer: Get copies of the tenant leases, and take note of the security deposits collected by the prior owner. In most cases, that amount will appear on your closing documents and reduce your needed cash at closing. Nonetheless, it is tenant money and should immediately be placed in a compliant trust bank account. You must then communicate to the tenants the amount that was transferred, who is now controlling it, and the bank in which it is held. If the prior owner transfers less than the amount stipulated in the lease, the prior owner must also provide clear documentation to both you and the tenant regarding the disposition of those fund
- What steps should I take if the existing tenants are not responsive or cooperative during the transition process, especially regarding signing new lease agreements or providing necessary documentation?Answer: Give tenants plenty of time to adjust to the change. Communicate everything once, twice, three times. Be nice, be friendly, be empathetic. Try multiple communication modes including emails, texts, phone calls, and in-person visits. Remember that your purchase of an investment property is exciting for you…but for your tenants it is just extra work. They will have to pay their rent differently, you will likely communicate differently than the prior landlord, and you may have different expectations.