When purchasing a property there are two options regarding tenancy. You can purchase the property with vacant possession, which means the property will be vacant on settlement. Or you can purchase the property subject to existing tenancies.
Subject to existing tenancies
When a contract is subject to existing tenancies, a copy of the tenancy agreement should be attached to the contract for sale. For residential properties this would be a Residential Tenancy Agreement. For commercial this could be a retail or commercial lease.
It is important that you read through the tenancy agreement prior to entering into the contract for sale as you will be required to honour the existing lease. Issues that you will need to consider are:
Do you require vacant possession on settlement? If the tenancy agreement has not expired the vendor will not be able to give you vacant possession. If the agreement has expired and it is a tenancy holding over, the vendor may agree to give the tenant notice to vacate after the contract has exchanged and make the contract subject to vacant possession.
You will start to earn rental income from the settlement date. So if you are buying for investment purposes you will not have to cover the costs of advertising for a tenant. You will however have to ensure that you are happy with the current rental amount being paid, as most residential tenancy agreements do not allow for a rental increase during the term of the agreement. You will therefore be unable to increase the rent during that term. Commercial or retail leases usually allow for an annual rental increase or review.
Has a rental bond or security deposit been paid? It is important to ensure a bond has been paid and the amount paid. This is usually one month’s rent. On settlement, your lawyer, the vendor and managing agent will need to arrange to transfer the bond or deposit to you.
Have there been any breaches of the agreement? You should ensure that there have been no violations by the tenant of the agreement, and it is important to make sure the rent and any outgoings are paid up to date, as the rent will be adjusted on settlement.
When the tenancy agreement expires, you have a number of options. You can give the tenant written notice to vacate (in NSW it is usually 30 days written notice, prior to the end date of a fixed term, however can be 90 days if the fixed term period has expired and no new agreement has been entered into). You can continue as is, or you can request that the tenant enter into another agreement.
Are you happy with the current property manager? It is important to talk to the property manager prior to settlement. If you feel they are doing a good job, you have the option to stay with them. If you feel the current property manager is neglectful, you always have the option of changing to another manager or manage yourself.
It is also important to take out landlords insurance. This will ensure your property and any contents you provide to your tenant is protected. You will also have the option of cover for any rent default or theft by a tenant.
Taxation Implications? Properties that are owned for investment purposes have tax implications. So, it is vital that you discuss these implications with an Accountant or Financial Advisor prior to purchasing.
Overall, purchasing a property with a tenant for investment purposes can be hassle free, if the necessary due diligence has been carried out prior to entering into the contract.
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