Investors sometimes seek out rentals to buy in hopes that the houses will later appeal to first-time home buyers upon resale. Many of these homes are priced at the lower end of the market and situated in nice neighborhoods.
Landlords may try to sell their rental homes to first-time homebuyers instead of another landlord because first-time homebuyers often lack negotiating experience and may pay higher prices.
Whether you're an investor or a first-time homebuyer, you should exercise caution when buying a rental. A home that was occupied by tenants could be an excellent deal, or it could be a deferred maintenance nightmare.
Look at the Neighborhood Before Buying a Rental House
One of the first things you should look for when you consider buying a rental is any other rental properties nearby. Talk to neighbors to learn quirks about the neighborhood and find out what kind of families live there. If all the other homes are owner-occupied residences, this could offer a bit of protection against possible market value fluctuations, since there will be more stability in ownership and occupancy.
If the rental house you're considering is the worst house on the street, you might be able to negotiate the deal of a lifetime. Is the lawn overgrown and the grass dying? Does it scream out for curb appeal?
Even if you can easily fix a problem on your own, you may still be able to use the flaw to your advantage during negotiations, especially if the flaws make it an outlier in the neighborhood.
Tour the Rental House Without the Tenants Present
It's best if the home is vacant, but some landlords leave the tenants in the property while it is on the market. If you're considering a home that is still occupied by tenants, try to arrange a time to visit the home while it's empty.
Touring the house while it's empty gives you the freedom to explore to your heart's content. When tenants are in the home, they might discourage you from opening cabinets or exploring closets. You can avoid those kinds of awkward interactions by finding a time to visit while the home is empty.
Be prepared to give the tenants notice (at least 24 hours) before previewing the home. It's typical for owners to require advance appointments, and tenants won't want a lockbox on the home if they still have valuables inside.
In extreme cases, tenants who want to remain in the home might try to sabotage the sale by exaggerating minor issues or fabricating problems that don't exist. Even if tenants aren't actively trying to sabotage the sale, they may not keep the home in immaculate showing condition. If that occurs, try to overlook the clutter so you can assess the house itself.
Overlooking Tenant Clutter
Dirty kitchen counters can be easily cleaned, so don't let those messes affect your opinion of the house. However, torn carpet, damaged drywall, leaky faucets, and similar issues will all require more significant repair work.
Look for Opportunities to Negotiate
Rental houses may sell for less than owner-occupied homes, especially if the seller is motivated. Keep an eye out for some of these common reasons why a rental home seller might be motivated:
- Tenants don't always pay their rent on time, but mortgage payments are due regardless. Many small-scale landlords can't afford to pay the mortgage if they don't receive the rent.
- Landlords sometimes get burned out by owning rental property, and demanding or difficult tenants can exacerbate the burn-out.
- If the seller has rented out the house for many years, the seller might have no depreciation left for a tax deduction. When that's the case, they may be eager to do a 1031 exchange into another property.
- A landlord with a tenant-occupied home who decides to sell during a falling market is ready to take the hit on the sales price.
- The home could require repairs that the seller cannot afford to make.
Uncover Potential Defects in the Rental Home
It's always a good idea to get a home inspection before buying a house, but this is especially important before buying a home that was rented. Owner-occupied homes tend to receive better maintenance because the owners are on the premises and can take care of small problems before they develop into major issues.
Ask your real estate agent for a list of referrals for home inspectors and interview them before committing. As you consider inspectors, take a look at a sample home inspection report. Bad home inspectors might generate three-page or four-page reports. Your home inspection report should consist of 30 or more pages, depending on the size of the home. Find out how the inspector was employed before they began inspecting houses, and try to find someone who has always worked in a similar field.
Don't check out of the process once you've found the right inspector, either. Clear at least two hours from your schedule (or more, depending on the size of the home) so you can be present and ask questions during the inspection.
If you find a major defect, ask the seller to fix it or credit you money toward your closing costs through a request for repair. Keep your requestions narrowly focused on the most expensive repairs—don't submit a laundry list of piddly requests.