How to Buy or Sell a Rental Property with Existing Tenants

Welcome to Canada's Property Management Podcast, your number one resource for investing, managing, and maximizing the value of your real estate assets. And now here's your hosts, Carla Browne and Adrian Schulz, Canada's rental property experts

Adrian Schulz (00:18):

On today's episode, we're talking about buying or selling a rental property with existing tenants. Now, obviously, there's different ways of buying a rental property. Sometimes, they're vacant. Sometimes, they're occupied by the person who owns it. And then finally, they may be already occupied by a tenant. Carla, how does this affect someone that's buying an investment property?

Carla Browne (00:47):

Yeah, this is an important episode. I'm just going to say that, Adrian, because as you're searching for this investment property and you're working with a realtor, a lot of people gravitate to properties that are already investment properties. And a lot of them are already going to be tenanted. And most realtors that I've talked to don't necessarily understand that a lot of the tendency acts, and why would they? They just don't deal in it day in, day out. They're not on top of the regulations. They know the real estate act, and that's the one that they follow. So I always say, "Please, talk to us as you're going through this process" because there's a couple things when a realtor is acting for a cell that they have to understand, or when you are the seller, is that, do you have a tenant in your property right now? And are they on a fixed term lease or a month-to-month lease?

Carla Browne  (01:33):

Because when you are selling your property and you have a tenant, you are actually selling that lease with the property. And so, a buyer is buying that tenant, so to speak, or that at lease that's in place. So if it's on a fixed term, then you have that for that period of time. And if it is on a month-to-month, then what needs to happen in order to deal with that specific tenant, if you're needing it to be vacant, or if you're needing to put a new tenant in there at that time. So understanding what's already in place is important because that's going with the sale.

Adrian Schulz (02:05):

So when you're looking at a potential investment property that has an existing tenant, and you see what the listing a future or an estimated pro forma, but the lease that you get when you're doing your due diligence has a totally different number, which number should you be using to do your own calculations on feasibility?

Carla Browne (02:29):

Yeah. It's the lease. And that's something that has to come as a condition of your sale, is you need to see that documentation that's there. You need to see what the lease terms are. You need to know whether or not they are following the residential tendency act. Sometimes we see where there's a tenant that has been in a property for a really long time, and they've had some rent increases along the way that have never been documented, so that needs to be documented because you're taking that on and you're only taking on what's written in paper. Also, if rents have gone up, you may not have increased the security deposit. So someone may be in a property paying $2,000 a month, but the security deposit is only $1,500 because that's what rent was when they first moved in. So you might want that bumped up.

Carla Browne (03:11):

There's so many things that you really need to really be looking at. And then there's the aspect of, how do you look at the property with the tenant there? How does that showing process go and how does it go smoothly? And now you have, I guess what I would call, emotions involved because now this tenant is going to have a new boss in town. So how is that all going to go over, and how do you make that all smooth, and comfortable, and the transition go well because if you are buying a tenant and you're hoping that tenant is going to stay, that's one set of things you have to deal with. If you're hoping you can get rid of the tenant, now that's a whole nother thing you got to look at, Adrian.

Adrian Schulz (03:47):

You mentioned before that when there's an existing tenant, you're essentially also buying that lease. Or in other words, that tenancy agreement is assigned to the new owner in the closing process. One of the things to be cautious of is, and each province has their own regulations on this, but if the rents are registered, you want to verify that the increases have also been registered. Otherwise, you could actually be liable through the assignment of any of the difference between what the lease says and what is registered. And there's a certain number of years that a tenant can go back to recoup the difference that was not actually registered and proved by the regional tenancy branch.

Adrian Schulz (04:37):

Personally, I'm a fan of registered rents and keeping record it's up to date with the tendency branch in each province, but there are certainly investment owners that take advantage of the income opportunities that can exist by not operating within the confines of the law. I'm not a supporter of that, but we have to recognize that there are in fact many investors who don't necessarily operate within the confines of the act, and that can have a significant change on the pro forma or cash flow of the property, but also of the risks associated with that tendency.

Carla Browne (05:17):

Yeah. Each province is going to be different that way. So it's important that our listeners definitely research what's happening in their particular province and how that works. The other part is whether or not there's any outstanding disputes because you're going to inherit all of those as well, and you're going to inherit that liability. So it is really important to understand that it's exciting, maybe, that you have a tenant and this property is now going to be paying you money as soon as you take possession, but there's a lot of things that could implicate whether or not that is positive in the end. And you need to understand how this all works. The other part is that what I have found investors going to sell their property because the real estate market may be very active, their particular property may be a particular property that maybe is time to dispose of for investment purposes, dispose of meaning, sell, but selling a property when you have a tenant is not as smooth as selling your own personal residence.

Carla Browne (06:12):

If you have an expectation that a tenant is going to be excited that the property is going to shown at five o'clock on a Wednesday night when they're in the middle of having supper with their family, they're not because you are disrupting them. You're disrupting what's happening. It's a change. Change isn't naturally liked by anybody. So all of these things now, as I said, it becomes a little bit more emotional. So you need to make sure that you are not involving the tenant in the process, but make sure that you're not hiding anything from the tenant. Talk to them about why you're selling. Talk to them that you're trying to sell to, or you're potentially selling to another investment person. And they will be a little bit more apt to cooperate because we've seen situations where they're not cooperative at all.

Carla Browne (06:51):

When you sell your house, what do you do before you leave the house that morning? You make the bed, you tidy the kitchen, you tidy up because you want it to be as showable as possible. Please don't expect a tenant to do that. They're not going to do it. That's just the reality. We hope that they'll clean up the clothes off the floor.

Adrian Schulz (07:13):

I think, when the opportunity exists, I prefer a vacant property. And some people I think, view that lease as being golden, especially when it comes to financing the investment property. But there's an alternative approach, which is called a market rent analysis, and it can be ordered as part of an appraisal. And in many cases, the market rent analysis will actually tend to be more, in many cases, than what a current lease might actually be charging. So always keep in mind the potential benefit of that market rent analysis that you can order along with the appraisal key point. Again, working with a qualified realtor who knows such things, and then making sure that your mortgage broker is using a qualified appraiser who has experience doing market rent analysis addendums with those appraisals.

Carla Browne (08:13):

Great point because, like I said, it seems like it's such an advantage when you're buying a property with a tenant, and it isn't always. It really isn't. We've seen it time and time again. And then we do find that tenants are being and sellers are being told one thing, and it's not necessarily in alignment with the act. And that's where I just say, "You got to do it by the book or else you are going to end up in trouble." And tenants know it. Tenants understand that they have rights through this whole process. So it is better have a conversation with them. What's the end goal for everybody? If the end goal is that that property's going to be vacant, then make that aware to the tenant, allow them to start searching now, and they're going to be a lot more thankful than just slamming it on them. That if your particular province allows for two months notice maybe, that now all of a sudden they're being forced to leave.

Carla Browne (09:01):

Change is natural. These things are going to happen, whether it's something that you've chosen to sell the property, or maybe you're forced to sell the property for whatever reason. t's going to happen once in a while, but it's workable if everybody is working together as much as possible. And the other part, this is a totally off what we've been talking about, Adrian, is that if you are buying an investment property, another thing that investors also look at is, "Oh, it's got an up-down down unit. Fantastic. Now I'm going to almost double my cashflow on this particular property." Is that lower unit a legal suite? And each city has very strict guidelines on what's legal and what's not. And you need to check this out. So make sure, again, that can be another condition of your sale that you want to make sure that things are legal. Have all the permits been pulled? These things could cost you so much money in the end if you're not aware of it.

Adrian Schulz (09:56):

I'm reminded of the benefits of title insurance. And I think I shared this in a past episode, where I had purchased a rental property, and at the time, I was literally too cheap to buy the title insurance. Well, I'll tell you, being cheap at that point cost somewhere in you in the range of 60 to $70,000. So if you've got the right people on your team when you're buying the investment property, listen to the professional advice that they have and that they give. And it reminds me of a point that you made recently, which was reach out to a professional property manager in advance, have them be part of this journey so that you are protected and that you, in fact, get to maximize the opportunity that exists with that investment property purchase.

Carla Browne (10:49):

Exactly. We can review all of that documentation that's there. We can look at rent roles. We can understand what's happening as far as the work that's been going on in the property. All of these things really play an important part as you start to go, "Well, how is that deposit going to be handled?" But I don't want to make it sound too complex, Adrian, but there's a lot of things that people just don't think of because it is much different than buying a personal residence. So lean on us a little bit, and we would be happy to help you through the process.

Adrian Schulz (11:18):

Yeah. The bottom line is that's real property management.

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