A lot of prospective investors, especially newer investors, are usually put off by inheriting tenants with below-market rents. And while it makes perfect sense why — especially if their leases are locked in for a long period of time and are not month-to-month — it can be nerve-racking to keep a tenant in place who is paying significantly below market rate.
But there is an upside to purchasing a property with a tenant who is below market rent.
Most multifamilies that are listed for sale are not fully maximized, fully renovated, and fully up to date. That usually means the tenants are paying below market value. Things aren’t fully renovated because, let’s face it, if they were, most likely that owner wouldn’t be selling — they would have a stabilized asset. Or maybe the current owner just wants to cash out or is tired of being a landlord. Either way, it’s up to you to see that upside.
As an agent, when I represent my clients and we’re purchasing properties with tenants in place, we of course do a full walkthrough to make sure the condition is solid. I also do extra due diligence on the current tenants by asking the seller for three months of proof of payment and researching eviction history, especially when buying in the Philadelphia area. This due diligence minimizes the buyer’s risk and gives reassurance that they’re purchasing a property with a stabilized tenant.
So why would it be beneficial to purchase a property with a tenant below market value and potentially locked in for the next year?
If, during the walkthrough, the property is in really good shape and well taken care of, that’s a major green flag. If the tenant has no eviction history and has shown consistent on-time payments for months, you’re technically inheriting a very solid tenant. The only issue is the rental amount — but that can actually be the opportunity most people miss.
When the lease term ends, you have the ability to adjust the rent closer to market value. If the tenant wants to stay and the property has been maintained well, you may be able to increase the rent without experiencing vacancy or putting money into renovations.
It can be a major win-win for both landlord and tenant if you agree on a price that works for both parties. For the landlord especially, it’s a big advantage if the tenant stays, keeps the property clean and organized, pays on time, and you don’t have to deal with vacancy or upgrades.
I always see value when I walk through a property for sale and see tenants keeping it in immaculate condition. Those are valuable people to a landlord.
So the next time you’re considering buying a property and the rents are low, ask yourself: Does the tenant keep it clean? Are they easy to deal with? Do they pay on time? Are there any red flags?
If not, you might have just created a very simple value-add opportunity with minimal effort.