What to know when buying tenanted property

When you buy a property, you expect to get just that – a property that you can do whatever you want with.

But some properties come with a little extra in the form of tenants who entered into a lease agreement with the previous owner of the property. While your ideal situation may involve either you moving in yourself or sourcing renters using your own criteria (and perhaps for a higher rent than the current tenants are paying), there may be advantages to buying a property as a package deal with tenants.

Buying time for big decisions

Regardless of whether you’re buying a property to live in or buying an investment property, opting for a property that comes with existing tenants can provide advantages. You have a guaranteed income from the moment the property becomes yours. That means there is no need to spend time and money finding someone to pay rent if you intend it as a rental property, and you can also have some additional income to put towards renovations – or even a knock-down rebuild – if you want to move in or rent it out for a higher price down the line.

Of course, some tenants may not be so beneficial to your property. They may be spotty with their rental payments, or they may be paying rent that is below the property’s market value. You must then decide whether to accept them or investigate whether there is a way to replace them.

Know the rules

As a buyer, you are entitled to know whether a property is tenanted, and all the details of the lease agreement before you agree to buy. There should be no surprises. The easiest way to find this out is by checking the vendor’s statement.

If there is a lease in place, you need to find out which type it is. Leases can be periodic (no set end date), fixed term or a month-by-month basis. If the lease is periodic, you may give the tenant 63- or 90-days’ notice to vacate. The timeframe depends on your reason. You may give 63 days’ notice if you or a family member want to call the property ‘home’, or workers you have hired need control of the site. You may give 90 days’ notice if you are selling, planning extensive redevelopment or demolition.

A fixed term lease is a little more tricky than month-by-month or periodic lease agreements. You cannot break the terms of the agreement and will have to see the lease through to its conclusion. Fixed term leases tend to be either three-month, six month or one year in length, so just be aware of how long you will have to wait for the lease to run out.

There are exceptions to these timeframes. These may occur if tenants have fallen behind in paying rent, caused significant damage or used the property for illegal activity. You could have good reason to apply to the Tenancy Tribunal and ask for earlier access.

On a more positive note, there can sometimes be wiggle room for negotiations between tenant and landlords if they know you are desperate to move in. Keep the lines of communication open. Perhaps paying for some of the moving costs could help you bargain for tenants to leave earlier?

Planning rent increases

If you want to maximise the return on your investment by increasing the rent, you may have to be patient.

Rent can only be increased once every 12 months, by law.

You are also within your rights as the landlord to change property managers or manage it yourself. However, you must inform the tenant of these changes and update the details on the lease agreement.

It's worth knowing there have been changes to tenancy laws in the past couple of years. We are summarising some of the key changes for you. You can find more detail at www.tenancy.govt.nz.

This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.