Pros and Cons of Buying Over a Tenanted Property

Many investors in Singapore are familiar with purchasing a property, and then renting it out. However, have you considered buying over a property that’s already tenanted? This is the norm for commercial property, but residential investors tend to be a bit more hesitant. As such, I feel it’s worth understanding the ins-and-outs of this particular investment method. We’ll also look at the less common situation where you buy a property as an owner-occupier, but it’s already tenanted.

What does buying a tenanted property mean?

tenants

This means that the property you’re buying has an existing tenant, and the lease of this tenant continues past the point where you take over the property.

In other words, you do not move into the property when you buy it. Instead, you become the new landlord, and will start to collect rental income from the tenant. At the same time, you will take over the same obligations and responsibilities in the existing Tenancy Agreement (TA).

Note that some investors actually go out of their way to look for tenanted properties, and do not want to buy new launch units, vacant units, etc.

Other times, it is simply a timing issue – for example, you see a property that you really want to buy, but it is still tenanted for the time being.

Why would someone buy a property that’s already tenanted?

Most investors who look for tenanted properties have a specific strategy in mind – that’s to focus on cash-flow positive properties. I’ll discuss this below. Besides this, there are other reasons why it can be advantageous:

  • Seeking a proven, cash-flow positive property
  • Saving on tenant acquisition costs
  • Quickly securing the property
  • Can sometimes be a way to save on furnishing
  • Certainty in getting a good tenant

1. Seeking a proven, cash-flow positive property

A cash-flow positive property is one where the total cost of the property do not exceed the rental income.

For example, say that a condo unit has monthly loan repayments, taxes, and maintenance fees that come up to $3,500 a month. However, you are able to rent out this unit for $3,800 a month. This pays for existing costs, while generating $300 on top of it.

This property can be considered cash-flow positive.

Note that a cash-flow positive property is not a “sure win” investment, as this strategy does not take certain factors into account. For example, the property may be 40 years old with little remaining lease. This means that, although you’re making money from it from day one, you still may not realise much in the way of gains (as the lease decay will cause depreciation).

For more on cash-flow positive properties, feel free to contact me, and I can help point out a few of them to you. We can also discuss whether this approach is right for your overall property portfolio, as it’s not suited for every investor.

In any event, investors pursuing this strategy may prefer tenanted properties. This is because they can see the real rental income, and compare it to their costs – this provides assurance that they’re not just speculating.

2. Saving on tenant acquisition costs

There is a cost to acquiring tenants, in terms of both time and money. Even if you don’t use a realtor to market your property, you will still need to bear the cost of putting up a listing. You also need to invest time in conducting viewings, negotiating with tenants, doing the appropriate paperwork etc.

Getting a tenanted property saves you the trouble of doing all this. There are still¬†some checks you have to make (e.g., inspecting the unit and the inventory, and understanding the TA) – but as a whole, it’s cheaper and faster than finding your own tenant.

In addition, some properties already have an ongoing “chain” of tenants. For example, students who live there may recommend the place to their juniors, who will move in when they leave. In some cases, foreign workers will recommend the same property to their colleagues when they move back home.

Some investors seek out tenanted properties where this sort of constant “handover” exists, thus saving on the need to market the property each time the lease ends.

3. Quickly securing the property

This scenario is relevant to home buyers. Let’s say you’ve found the ideal property, but it’s already tenanted. You have two choices:

First, you can wait until the tenant’s lease is over, and then attempt to buy the property. However, this assumes you have time to wait (if you’re buying a resale unit, odds are your intent is to move in right away, so this may not be possible).

You also run the risk that someone else may be willing to buy the property while it’s tenanted.

Second, you can quickly secure the property by buying now. You can then use the rental income to offset costs like mortgage interest, initial loan repayments, etc., while waiting for the tenant’s lease to expire. This still involves a bit of waiting, but it’s likely not as long as waiting for a new property to be built.

As such, some home buyers choose a tenanted property, even though they have no intention to be landlords for long.

4. Can sometimes be a way to save on furnishing

When you buy over a tenanted property, the existing furnishings are usually included in the transaction. Otherwise, the furnishings will belong to the tenant. In either case, this saves you the initial cost of buying the beds, fans, desks, etc.

(You may still need to furnish after the tenant moves out, but at least you would have collected rental income to offset the costs by then).

Some landlords will buy over the existing furniture from the tenant when the lease expires too – foreign tenants often “fire sale” their furniture when they’re going home, so there’s a good chance you’ll get a good deal.

5. Certainty in getting a good tenant

You can view the property, and know whether the tenant keeps it in good shape. You can also talk to the condo staff or existing landlord, to find out more about the tenant. This helps to mitigate the risk of getting a “nightmare tenant”, who could destroy the property.

This is a good way to remove some of the guesswork (people can be hard to judge!) and the risk involved in being a landlord.

You do need to be careful in checking the TA, however, before you buy over a tenanted property

There is an “extra step” in such a purchase. This means reading through the TA, and taking note of what you’re responsible for (e.g., are you or the tenant paying for utilities? Which items in the property belong the tenant, and which ones are you buying over? Has the tenant’s security deposit been transferred over to you?)

If you’re not sure how to read the TA or how it works, drop me a message; I can help break it down for you.

Finally, if you’re a home buyer, note that you don’t have to wait till the lease ends.

Don’t feel forced to buy a tenanted property. You can negotiate to have vacant possession to move in right away; it’s up to the seller to work this out with the tenant (they will probably have to pay back the tenant to compensate for the broken lease).

If it’s not urgent to move in however, or if the remaining lease is short – such as less than a year – then do consider the merits of being able to collect rent. Also, I would suggest you not to delay in buying a good property, just because it’s currently tenanted – there have been many cases where prospective buyers wait till the lease is over, only to find out the property has already been bought.

For more on the Singapore private property market, as well as various asset progression and property wealth methods, follow me on RonChongProperty.sg.

 

 

Like what you are seeing?
Contact me for more information!

contact me



I am here to help with all your real estate needs and questions.
Let me know what's on your mind and start a conversation.

    Open chat
    Whatsapp