Investors acquire real estate for a variety of reasons, one of which is the potential for cash flow from tenants. While tenants can be the backbone of potentially successful real estate ownership scenarios, when it comes time for disposing of that duplex or small shopping center, the potential seller may ask himself/herself: “Can I sell my rental property with tenants in it?”
Legally, the answer is yes, at least, for the most part. Depending on how the lease or rental agreement is structured, most states’ laws give tenants the right to remain in a rental property before, during, and after a sale. Fixed-term leases don’t expire when selling rental property; those leases transfer from the seller to the buyer.
However, just because an investor CAN sell that fully occupied property doesn’t necessarily mean it SHOULD. There are advantages and disadvantages to selling an occupied rental property, versus one that is empty.
When tenancy works
Having a tenant and/or tenants in place during the sales process can provide the following benefits.
Ongoing cash flow. As mentioned above, one potential benefit of investment real estate ownership is that of cash flow, courtesy of the monthly rents from sitting tenants. When tenants remain in place, the cash flow is ongoing. Another advantage is that, depending on the lease, tenants also assume costs for utilities, which reduces the expenses of a new owner.
Better security. Properties occupied by tenants during the sales process tend to be more secure than vacant properties. An occupied rental is less likely to attract vandals or thieves, which can lead to a reduction in property value.
Time savings. Another selling point to a rental property with tenants in it is that the new owner won’t have to spend financial and other resources to find, screen, or negotiate with new occupiers. The buyer can continue with the status quo.
Some tenancy downfalls
While having tenants in place can be beneficial to an on-the-market property, the following caveats should be considered during the showing and sales process.
Tenants’ schedules. Owners can show empty properties any time to potential buyers. This is not the case when tenants are on board, however. Sellers need to schedule showings with tenant convenience in mind, meaning the need for cooperation from the occupiers.
Property condition. Not all tenants are interested in preserving the integrity of a real estate asset. Damages could range from ground-in carpet dirt, to holes in walls, to stolen light fixtures, or even appliances. This could decrease the property’s value, and add unwanted expenses to a buyer’s income statement.
Long-term lease. The long-term tenant lease is an advantage in some cases. Unless the potential buyer wants to live, or work, on the premises, post-sale. In this situation, a long-term lease could actually be a disadvantage, as the buyer would have to wait until its termination to move in.
To tenant or not to tenant
The takeaway from the above is that there is no legal reason why an investor can’t sell rental property with a tenant, or tenants, in it. Real estate assets sell every day, without tenant displacement. As such, the focus should involve whether occupiers are beneficial to the showing and sales process, or if they might interfere with it.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
There is no guarantee that the investment objectives of any particular program will be achieved.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time.
Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants.