Existing tenants complicate purchase of rental property
Q: My partner and I are thinking about buying an investment property in our home town while we rent in the city. Many of the places we have been looking at are already tenanted, so we feel confident that we won’t have any trouble renting it out. We aren’t sure what our rights and responsibilities are to sitting tenants though, or if this changes the buying process at all. Is there anything we need to know?
Buying a property is always a big deal, whether you’re planning to live in it yourself or not.
Nearly 40 per cent of New Zealand property buyers already own multiple properties, according to recent data from CoreLogic, but that doesn’t make buying one as an investment any less of a bold move. I trust you have done all your homework about the ups and downs of both investing in property and becoming a landlord.
There is a lot to take into account, such as the tax implications if the property is re-sold within two years (or five, when the new government implements its plans). Some councils levy rates differently depending on how a property is used, which can add significantly to your costs, and insuring a tenanted property can cost more because rentals are more subject to damage.
I can understand why you like the idea of buying an investment property that already has sitting tenants, but it’s important to understand the impact this may have on the sale process.
When you’re buying a property that is vacant, you are generally entitled to one opportunity to a final inspection of it before settlement (when you pay the balance of the money to the seller and get the keys). This inspection is to make sure that it’s in the same or better order as when you viewed it and agreed to the sale. If you’re buying a property with sitting tenants this process is more difficult and can raise all sorts of issues.
To ensure you can still conduct a final inspection, we recommend asking your lawyer to ensure there is a ‘‘final inspection’’ clause inserted in the sale and purchase agreement before you sign it. If you’re buying a property by auction, you will have to negotiate this with the seller (through the real estate agent) before the auction takes place. You’ll also have to make this a condition of the sale if buying by tender or deadline sale, if not agreed prior. Your lawyer can help you navigate this process.
You may also wish to seek advice about getting a methamphetamine test included as a condition of the sale.
A change of ownership also doesn’t mean you have the immediate right to ask the current tenants to move out. Generally speaking, under the Residential Tenancies Act tenants must be given at least 42 days’ notice to leave a property. If you want the property to be empty when you take ownership, you may need to negotiate a longer settlement period with the seller to enable this.
If you are taking over the property with the tenants in place for the remainder of their tenancy agreement, the previous owner must let the tenants know that you are the new owner and give you a copy of the existing tenancy agreement. When you take over ownership, you must tell the tenants your name and contact details, and advise them how their rent is to be paid. If someone else is managing the property for you, let the tenants know who to contact in case of any issues.
Most tenancies require a bond to be paid as security in case of any damage or unpaid rent.
When a tenanted property is sold, the seller cannot make a claim to any bond unless this is done before the property changes hands.
It’s a good idea to check with your lawyer that any bond conditions are spelled out in the sale and purchase agreement.
Lastly, don’t forget to factor in that buying an investment property also requires you to become a landlord with a long list of responsibilities to your tenants.
It’s your investment, but it’s their home. ❚ Kevin Lampen-Smith is the chief executive of the Real Estate Agents Authority (REAA), the independent government agency that regulates the New Zealand real estate industry. If you have a question about buying or selling property, send it to susan.edmunds@fairfaxmedia.co.nz For independent advice on buying or selling property, check out www.reaa.govt.nz.
Buying an investment property also requires you to become a landlord with a long list of responsibilities to your tenants. It’s your investment, but it’s their home.