The Australian real estate market offers an array of opportunities for investment. A common type of real estate investment is residential property with existing tenants. This can be an appealing option for various reasons, including the benefit of receiving rental income immediately after purchase. However, these types of properties also come with their own set of considerations.
In this article, we will explore the nuances of buying a residential property with existing tenants in Australia, from understanding vacant possession to evaluating lease agreements, assessing existing tenants, and determining your post-purchase intentions.
Terminology
When considering the purchase of a residential property, it is essential to understand whether you are acquiring it with ‘vacant possession’ or ‘subject to existing tenancies’. Acquiring a property with vacant possession offers you the flexibility to immediately move in, renovate, or lease it as you see fit. This is obviously an attractive option if you plan to live in the property or wish to move forward with significant renovations.
Buying a property subject to existing tenancies, by contrast, means that you will inherit the current lease agreement, including its terms and conditions. This may be appealing if you are seeking an investment, as the rental income will immediately begin to generate income from the rental payments.
Type of Tenancy
Of course, tenancies come in different forms, from a fixed-term lease for multiple years to a month-to-month agreement. If a property is subject to an existing fixed-term lease, you may need to wait until the lease term expires before taking possession for personal use, unless there is an early termination clause in the lease. Even when the term comes to an end, you will still need to provide the tenants with proper notice, in accordance with the lease or governing law, well in advance of the lease’s end date.
By contrast, to terminate a month-to-month lease, you generally only need to provide written notice in accordance with the rules regarding the notice period in your state or territory. Of course, the notice of termination must also comply with the other regulations and formalities of the relevant state or territory.
Prior to Buying
Prior to buying a property, you must perform your due diligence. First, the contract of sale should clearly specify whether the property is being sold with vacant possession or subject to existing tenancies. If there is a tenancy, the seller should provide the prospective buyer with a copy of the existing lease agreement for review. When reviewing the lease, you should pay particular attention to terms such as the lease duration, rental amount, termination provisions, security deposit, and any special conditions.
Although the contract of sale should specify any existing leases, as the buyer you (or your solicitor) should also make separate enquiries to ensure that there are no leases which have not been declared. In some jurisdictions, registered leases will be recorded on the title of the property.
Evaluating Existing Tenants
When buying a property subject to an existing tenancy, it is an important step to assess whether you are comfortable entering into a business agreement with the current tenants. If the tenants are reliable, you may choose to keep them in place and enjoy the benefits of immediate rental income. In contrast, if you are not comfortable with the existing tenants, this may be sufficient to discourage the entire investment, even if the property is otherwise ideal.
When assessing the existing tenants, you can ask the seller (or the property agent) for information about the tenant’s payment history to ensure they are consistently meeting their rental obligations. A past issue with rent arrears is a red flag that may indicate this is a bad investment.
You can also verify whether the tenants have adhered to the other terms of the lease agreement, including any restrictions on subletting or property alterations and whether they have looked after the property. Finally, you can consider the overall ease of communication with the tenants, as good communication can simplify the process of future negotiations.
Conclusion
Purchasing a residential property with existing tenants in Australia offers both financial advantages and unique challenges. A clear understanding of the terms of the lease and the nature of the existing tenants is vital to determine whether to proceed with the transaction.
Whether you decide to retain the existing tenants for rental income or to move into the property, it is essential to comply with the notice requirements outlined in state or territory laws. Engaging with a real estate professional and/or legal advisor experienced in property transactions can provide valuable guidance and ensure a smooth transition.
This is general information only and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please contact us on 07 3261 0400 or email [email protected].
Rod Holloway was born in Boondall and was educated in the area.
Karen Kerr is the Practice Manager and Senior Paralegal who has worked in a number of firms over the years and has now worked at Rod Holloway & Co in excess of 25 years.