When purchasing a buy to let property, investors are sometimes offered the opportunity to acquire the property with tenant ‘in situ’. This essentially means that the tenant currently living at the property will stay in place as the property is sold and become the tenant of the new investor/owner.
With more people renting in the UK private sector and for longer tenancy periods, this is becoming a more common occurrence. Indeed, Countrywide Residential Lettings research found that more than one in ten rental properties bought by landlords came with a sitting tenant, a fourfold increase since 2008.
Why would I do this?
There are certainly some advantages to buying an investment property with a tenant in situ. The bottom line is that if the process is managed well, buying with tenants in situ can save you money. A recent study identified that completing a property investment without having tenants ready to move in can cost landlords an average of £2,000.
These benefits of buying a property with tenant in situ include:
- It’s one less thing to think about ! Buying a ‘buy to let’ property is a pretty involved process and having a tenant already in place gives you one less thing to think and worry about.
- It provides a level of surety of how much rent and what return you can expect! When buying an investment property, one of the key considerations is the return that will be earned, both in terms of capital gains and rental income yield. Buying with a tenant in situ means that investors have a clear picture and certainty over level of rent they will receive. This is particularly important if you are mortgaging the property as any lender will want to see an adequate level of interest coverage (ensuring that rents are sufficient to cover interest payments on the loan and other ancillary costs of managing the property).
- It avoids a vacant period between completing the purchase and finding a tenant! Most landlords know that excessive void periods can quickly kill the income yield on a property. Having a property sit empty means that you are not receiving any income to cover the mortgage or bills. Buying with tenant in situ eliminates the initial void period.
- It avoids other related expenses! Managing a buy to let property can be quite complex as there are lots of legal and regulatory requirements that need to be met to safely let a property. For example, the electrics might or heating systems might need to be upgraded or the property refurbished or redecorated before being let out. Also, there will almost certainly be expenses incurred to find a new tenant. With a tenant in situ, many of these costs can be avoided.
- You know what you are getting into! Even with the best tenant vetting processes, there are problematic tenants who do not pay the rent or do not look after the property. Buying with a tenant in situ means that that you can do 'due diligence' as part of the purchase process to see whether the tenant has continuously paid on time. Also, when undertaking a viewing, you will get a first-hand opportunity to see how the tenant looks after the property.
- You can use the information as part of your purchase due diligence! You can also use the tenant to assist you in your purchase due diligence as they will probably know the property better than anyone else and can advise you of issues such as a leaking roof, damp or if boiler isn't functioning properly etc.
What should I consider?
Firstly, if you are thinking of buying with a tenant in situ, it’s important that you use a solicitor or conveyancing firm that has experience in dealing with such matters. While the majority of the conveyancing process is standard, with a tenant in situ there are a few additional checks and balances that the solicitor should be performing.
- Liability - When you become the owner of the property, you will take on the associated liability. It is important that you assure yourself that the property is indeed up to the appropriate standards to be legally let.
- Tenant Rights - You will need to understand the rights the tenant has and the form of tenure under which they occupy the property. Most tenants will occupy via an assured shorthold tenancy agreement or a periodic tenancy, which means that if things are not working out you can start eviction proceedings. However, some tenants might be regulated by legislation and might occupy under a protected tenancy and as such, it could prove more difficult to change any terms and conditions or remove them from the property.
- Legal requirements - Has the current tenancy been entered into correctly? Is there a current EPC, Gas safety certificate, EICR? Were right to rent checks undertaken? Are there appropriate smoke and carbon monoxide alarms in the property?
- Property condition - Was a full inventory and condition report undertaken at the start of the tenancy? if not, then one should certainly be performed as part of the purchase process and ahead of the sale completing.
- Tenant obligations - Is there a history of rent being paid on time? Are there currently any rent arrears? Also, is there evidence that the property is looked after by the tenant and that the tenant is aware of, and acts in accordance with their tenant obligations.
- Deposits - Ensure that any deposit taken is in accordance with the Tenant Fees Act 2019 and has been placed in an approved depository schemes. On completion, arrangements should be made to transfer the deposit to reflect the new landlords ownership.
- Rent apportionment - When buying with a tenant in situ, it often makes sense to complete the purchase on a rent due date so rents do not have to be apportioned.
- New landlord details - On completion of the purchase, serve a notice under section 48 of the Landlord and Tenant Act 1987 to advise the tenant of who their new landlord is and their new address.
- Existing managing agent - Also, where the property is managed by an agent, you will need to decide whether you are going to leave it with that agent, move to an alternative agent of self-manage.
Are there any issues or risks involved?
The key thing to keep in mind is that when you buy a property with a tenant in situ, you immediately assume the risks and potential liability for the property and the tenancy. Any investor looking to purchase such a property should satisfy themselves through adequate due diligence that the risks and obligations have been appropriately dealt with and managed historically and can continue to be so moving forward.
Important – The above information is provided for information purposes only and does not represent the full extent of legal obligations and duties placed on landlords or the full checks to be conducted when buying a property with tenant in situ. The use of this website and the information contained herein is subject to the terms and conditions of use o the website. The legal names of Companies trading as Aspire Residential may be found on our website and is available for inspection at our registered office address. We recommend that you seek the appropriate advice, including legal advice, before buying and renting out a property in England or Wales.