Buying with a tenant in place: the yield and the risk
A tenanted property comes with income on day one and an occupier you did not choose. Both of those are the investment case.
Buying a property with a tenant in place means the income starts immediately, there is no void, and the property is already proven to let. Those are genuine advantages, and they are why investors buy tenanted stock.
The risks are equally real. You inherit the tenancy, the tenant and the rent, and you have limited ability to change any of them in the short term.
What to establish about the tenancy
The tenancy agreement is the document that governs everything, and it should be read in full rather than summarised. What is not in the agreement matters as much as what is.
- The type of tenancy, its start date and whether it is in a fixed term or periodic
- The rent, the payment frequency, and the date of the last review
- Whether the rent is at market, above it, or below it — each has different implications
- The deposit, whether it was protected correctly, and whether the prescribed information was served
- Whether a section 21 notice could validly be served, which depends on compliance with the deposit, gas safety and EPC rules
- Any guarantor, and whether the guarantee survives the change of landlord
- The condition of the property, evidenced by the check-in inventory and any recent inspection
The risks
The main risk is that the tenant is not someone you would have chosen. A tenant in arrears, or one whose behaviour has prompted complaints, is a problem you inherit along with the income.
The second is that the rent is above market. A seller who has not reviewed the rent for years may have a tenant paying below market, which looks like upside, or a tenant paying above it, which means the rent will fall at the next review and the yield you bought is not the yield you will have.
- Arrears history, which the seller should be asked to evidence rather than describe
- Any complaints or disputes, from neighbours or the council
- The condition of the property, which the tenant may not have maintained
- Whether the rent is sustainable, and whether a review would raise or lower it
- Whether vacant possession could be obtained if you needed it
Valuing a tenanted property
A tenanted property should be valued on its income and compared against other tenanted stock, not against vacant properties. Where the tenant is paying market rent and the property is in good condition, it is worth close to the vacant equivalent minus a small discount for the reduced buyer pool.
Where the rent is below market, the property is worth more than the current income suggests, because a new landlord can review it. Where the rent is above market, the opposite applies and the yield should be assessed on the sustainable rent rather than the passing one.
Common questions
- What should I check before buying a tenanted property?
- The tenancy agreement in full, the rent and its last review date, the deposit protection and prescribed information, the arrears history evidenced rather than described, and whether a valid section 21 notice could be served if you needed possession. Also establish whether the rent is at, above or below market, because it determines the sustainable yield.
- Can I increase the rent after buying a tenanted property?
- Usually yes, using the statutory rent review procedure or by agreement, but the process and the notice required depend on the tenancy type. If the passing rent is below market there is upside; if it is above market, expect it to fall at the next review and value the property on the sustainable figure.