The Pros and Cons of Inherited Tenants

Inherited tenants can be a blessing or a curse — and sometimes they fall somewhere in between. Some investors refuse to buy a property if it means inheriting tenants. Others, with proper vetting, see them as a head start on cash flow.

When Inherited Tenants Are an Advantage

If a real estate investor can confirm the following, an inherited tenant might be perfectly acceptable:

• The tenant meets the criteria the new owner would use anyway — credit score, employment, background check, prior landlord references. (This means the seller's screening file must be available to you.)
• The tenant has paid in full and on time, with proof of those payments.
• No reports of damage or disturbance.
• The seller received a security deposit.
• There is a written lease in place, and you've reviewed it.
• Current rent is at or near market.
• You've been able to inspect the occupied unit and are comfortable with its condition.

Workarounds When You Can't Confirm Everything

If the lease agreements don't exist

Have the tenants sign Estoppel Agreements. (Best practices for these are a separate topic, but make sure the agreement is specific about ownership of appliances — otherwise the appliances you thought came with the property might grow legs and walk away.)

If current rent is below market

1. Tell the tenant the rent will rise when the current lease expires. Soften it with comp data and offer to phase the increase in. In Maryland, even without rent control, if your lease has an automatic renewal clause, the landlord must notify you of a rent increase or any other change with enough notice for you to decide whether you want to renew.
2. Maintain the current rent for a period of time to build goodwill and encourage continued tenancy.
3. If the unit's condition doesn't support market rent, accept the cost of a vacancy plus repairs and don't renew.

If You Decide Against Inheriting Tenants

• Make the purchase contingent on successful eviction of a non-paying tenant before closing, or
• Factor into the offer the legal costs of eviction, the months it will take, and the months before re-rent if there are habitability issues or upgrades needed.

Negotiation Best Practices

• The Purchase Agreement should require the seller to deliver prorated rents and security deposits at closing. If there are no security deposits on file, negotiate that.
• The Purchase Agreement should bar new leases from being signed after it's executed.
• If any unit will be delivered vacant, specify that the unit will be empty and broom-clean at closing.
• Require the seller to provide all relevant tenant records.
• Have the title company hold rent in escrow until the purchaser is paid in full.
• Require a walk-through of every unit before closing.

After Closing

• Many investors recommend getting the existing tenant on the new owner's rental agreement as quickly as possible — ideally month-to-month at first. (Note: in Maryland, the tenant has no obligation to sign a new lease while an existing one is in force.)
• Ask the seller to send the tenant a written notice of sale.
• Follow up with a letter of introduction from the new owner. Lay out expectations: rent due dates, how rent is paid, how to contact the landlord, and how maintenance requests are made. A short in-person meeting and even a small welcome gesture go a long way.

The Gray Area

The hardest call is the cost-benefit analysis on a near-perfect tenant with one issue. Long-time, quiet, always pays on time — but smokes indoors, and the smoke is permeating the second unit of a duplex. Or has an aggressive dog. There is no one-size-fits-all answer; you weigh the risk of vacancy and a less-known replacement against the friction of the existing arrangement.