Pros and Cons of Buying a Tenanted Investment Property

While there is no hard and fast rule about whether buying a tenanted property is a good investment, there are pros and cons to purchasing a property where you will be assuming existing tenants. Once you have identified a property that meets your requirements and budget—whether it's retail, office, industrial or multifamily—consider these factors when weighing the benefits and risks of assuming tenants:

Risks to Consider

• You are assuming a tenant chosen by someone else. You must also accept the revenue and potential liability associated with that tenant. If they are on a lease, you are bound to the terms of that lease, including their rental rate. Knowing the market rents in your area will allow you to evaluate how their number compares.

• It's been known to happen that a seller has filled the property with his own business, paying above market rent and effectively driving up the price of the property. If they were to vacate, you wouldn't be able to find a new tenant at that rate.

• Based on the local rent controls, if you are buying a multifamily investment, you may be very limited in the amount you can raise rents each year. This will impact your future cash flow and property value.

• If it's an office building you're considering, keep in mind that not all companies and their clientele are created equal when it comes to tenant culture. Even though their business type may be permitted within the property zoning, the type of work they do may not be one that you believe will bring the greatest value to your property—due to factors such as clientele, risk, and their hours of business. With the recent legalization of marijuana in many states and provinces, landlords are faced with the dilemma of whether the business suits the profile they want to achieve.

• Whether you like it or not, much of your investment property's value is derived by its net operating income (NOI). If the lease of a property you are purchasing did not effectively negotiate market rent escalations, you may not see the building value rise at the rate it should.

Benefits to Consider

• Buying a tenanted property can make it much easier to finance. Having leases in place gives lenders confidence in a property's ability to generate revenue. Lenders want guaranteed rent by way of signed leases.

• You'll receive rent immediately, which means you'll save time and money once the property transaction closes. Indefinite vacancy and the costs associated with leasing will not be concerns.

When buying a tenanted property, it is crucial that all leases are reviewed during the due diligence process to mitigate your risk and accurately evaluate the opportunity.

About the Author: Lucie Brusse
Lucie Brusse is a real estate advisor with Ontario-based Royal LePage Commercial. She brings almost 15 years of practical, real estate experience, as well earlier experience with luxury hospitality. She has launched and operated a thriving recruiting franchise that generated more than $2.4 million in annual sales.