Buying a rental property with sitting tenants

If you are a landlord looking to expand your portfolio, or you are buying your first rental property, it is worth taking the time to consider the advantages and disadvantages of buying a rental property with sitting tenants.

What are sitting tenants?

A sitting tenant is someone who is currently renting a property which is up for sale. If the sitting tenants have an ongoing rental agreement with the landlord or are still within their original rental period, then the sitting tenants have the right to remain in the property once the rental property is sold.

As there has been a tendency towards longer-term rental periods and an increase in landlords looking to sell their rental properties, it is now not uncommon to find rental properties for sale with in situ or sitting tenants. There can be both positives and negatives to buying a rental property with sitting tenants, and for newbie landlords, it is particularly important you understand these so that you can make an informed choice on purchasing a rental property.

How does having sitting tenants impact the value of the rental property?

As a rule of thumb, having sitting tenants will slightly reduce the advertised sale price of a rental property. This is in part because having sitting tenants limits the sale market to those looking for a rental or investment property, rather than those looking to purchase a home for themselves. But it is also due to the perceived additional risk of taking on an existing tenant whom you have not personally had vetted.

There are two ways to look at this: you could see this as a negative, as it shows that even estate agents are aware that there is a downside to purchasing a rental property with sitting tenants. Or you could look at it as a chance to buy a property while it is undervalued and potentially get a bit of a bargain. Your view will likely depend on your personal experience of rental property ownership, but it should also be assessed on a case-by-case basis, as the specific situation of the rental property and the sitting tenants may impact how likely the property is to be a bargain or a nightmare.

What to ask when considering buying a rental property with sitting tenants

To effectively evaluate a rental property purchase with insitu tenants, you need to gain some key information to understand the current situation of the rental property and the tenants.

Initially, you need to establish what the tenants are currently paying in rent. Then ask yourself if this would provide adequate yield for the sale price advertised for the property. In Torbay, the average rental yield is thought to be around 5%, while the national average is just over 3.5%. A good yield to aim for in the rental market is between 6-8%, but this will also depend on the property type, your area and what you are comfortable with as a yield value. You may be willing to accept a slightly lower yield for tenants who look after the property well and are easy to deal with.

If the current rental value is not providing adequate yield, you need to consider how easy it would be to rectify this. For example, if the current rental value is close to your golden number, then how far away is the next rent review for the sitting tenants and would the level of increase be reasonable. If, as is often the case, the rent is well below market value, and you think you would be unlikely to get the sitting tenants up to a fair market price for the rent, then you need to consider the next steps.

Taking on a rental property with sitting tenants just to evict them as soon as possible is not uncommon, but we tend to recommend that landlords avoid this if possible, either by choosing to buy a different property or by considering what steps they could take to get the rent up to market value over a slightly longer time period.

As part of this process, it is also worth finding out the history of the tenancy. Find out how long the sitting tenants have been in the property and how often they have had rent reviews previously. This will help you to establish if a rent increase will be achievable or taken well by the sitting tenants. It can also give you an indication of what type of tenants they are if they have been in the property for a long time and maintained it well.

You should also consider what, if any, work will need to be done to the property in the near future. This could include smaller tasks such as redecorating or larger projects such as a new kitchen. Consider these costs in terms of how it will impact the required rental value for the yield you want to achieve. You may also need to consider what work would need to be done if the sitting tenants left: if they have been in the property for a long time, then there is likely to be significant redecoration required due to wear and tear.

The value of involving a letting agent early on

All of these considerations will help you to assess if a rental property with sitting tenants is a good deal or not. But if you are new to taking on a rental property with sitting tenants, or you are a newbie landlord in general, then we would always recommend seeking professional advice from letting agents. Beyond providing advice, a letting agent can also work as a good intermediary for the sitting tenants as they can oversee any rent reviews or changes in the rental property management. This allows you to position the letting agent as the bad cop to your good cop if needed, which can help to keep communication positive between the landlord and tenants.

At Bright Star Lettings, we are always more than happy to help our landlords evaluate the potential opportunity of a new investment property. If you are a newbie landlord looking to purchase a rental property, please get in touch, and we will assist you in finding the right rental property for your goals.