My Experience Buying a House With a Tenant Without a Lease Agreement

The first investment property I ever purchased (a duplex) came with tenants (tenant #1 and tenant #2) that didn’t have a lease agreement. Since I had never purchased an investment property before, It didn’t seem like a big deal. However, after seeing a few questions related to this being asked on Reddit – I figured I’d talk about my experience.

Overall, there were a few things that helped me get through the entire process of buying a house with existing tenants.

Talk with the tenants

During the first showing of the tenant-occupied property, before I had even submitted an offer, I had conversations with the tenants.

The conversations were overall straightforward. I thanked them for allowing me into their house (the unit) and showed the utmost respect (for example, taking my shoes off before walking around).

While walking around, me and the tenants (mainly tenant #1) would talk about things related to her unit or she’d ask me questions.

During our conversation, I’d ask a few questions such as:

• If I purchased this property would you still want to live here?
• What do you like about living on this property?
• What do you dislike about living on this property?

Those three questions not only helped me learn a little about the tenant (primarily tenant #1 – tenant #2 was a problem), but they also helped me learn things about the property that weren’t disclosed.

For example, the property had water coming through the foundation walls but didn’t have any obvious signs showing that problem. I didn’t tell the inspector about this (to see if he could spot this issue even though I didn’t see obvious signs) and he didn’t report on it (because there was no obvious way to tell unless it rained for a while).

Verify the lease agreements (or lack thereof)

During the due diligence phase of buying this investment property, I assumed the existing tenants had an existing lease.

Since this was my first time buying a property, I only asked my real estate agent to ask the seller for a copy of the current lease terms for the existing tenants living in the rental property. After about a week, I eventually received the “existing lease” for the current tenants.

There was no lease at all for tenant #1 and the lease that was supposed to be for tenant #2 was for someone else completely (you’ll learn why later).

This didn’t seem like the “right” way to run a rental property. And because I was going to be the new owner, I consulted with a couple of real estate investor “friends” (people I’ve talked to online) to get an idea if not having a lease was a big deal.

Ultimately, I learned that there were state and local laws that I had to abide by. Although it took some time, I eventually learned what I needed to know (via Google) to feel comfortable with the legal risks moving forward.

At the time, I didn’t have the funds to consult with an attorney but it would have made understanding state law and local rental laws much easier. If you have the funds, I highly recommend consulting with someone who understands your local landlord-tenant laws.

Check if the tenants are current on rent

Because I came into this with no experience, there were a lot of things I did wrong.

My inexperience led me to not even think about asking if the tenants were current on rent. For some reason, I didn’t even think about it – even though I knew it was a possibility.

Thankfully, the people helping me (real estate agent, title company, lender, etc..) had been through similar situations before and knew to ask questions that I didn’t.

Right before my home inspection, I received an email wanting me to confirm that I knew the tenants were late on rent.

This was brand new information to me. While I wasn’t surprised that tenant #2 was late on rent, I was very surprised that tenant #1 was late on rent.

Tenant #1 hadn’t paid rent in 2 months.

Tenant #2 hadn’t paid rent in 3 months.

After learning this information, since I was at the property with my inspector, I decided to ask the tenants about this.

Tenant #1 wanted to stay while tenant #2 wasn’t even the actual tenant for that unit. The guy living in tenant #2’s unit was her boyfriend. When they broke up, tenant #2 moved out and he continued living there.

Tenant #1

Tenant #1 was easy to talk to and seemed like a good person. She told me that the seller told her she didn’t have to pay rent while the house was up for sale.

Obviously, this sounds like a complete lie but I chose to verify this info with the seller – just in case. The seller verified that what tenant #1 said was true. Even though this was in writing and the owner verified it, I still didn’t believe a landlord would tell someone would tell a tenant to not pay.

But, since tenant #1 seemed like a good person and the seller confirmed what she said, I accepted it and moved on to tenant #2.

However, I made sure tenant #1 understood that she’d be paying rent again if I purchased the rental property.

Tenant #2

Tenant #2’s boyfriend was difficult to talk to. He seemed to bash the property, the landlord, and tenant #1; plus he was upset that I was inspecting “his” unit. He said that he was moving out at the end of the month (the current month at the time was May).

His living situation and attitude gave off so many red flags that I found it hard to believe anything he said. So, I asked the seller and she said that she wasn’t sure what was going on with tenant #2’s boyfriend or that unit at all.

This is when I decided to add a clause into the purchase agreement that I would not purchase this property unless Tenant #2 (her boyfriend or whoever) was evicted and that unit was completely vacant.

This worked out better for me in the end, anyway.

I was only purchasing this property because I needed to move to the other side of town. So having one unit vacant allowed me to do my renovations and move in without having to wait until their lease expires or legally evict one of the inherited tenants.

Making things better than the previous landlord

After purchasing the rental property, it was time for the first official landlord introduction for tenant #1 (tenant #2 was evicted). As the current owner and current landlord, I got to work on getting the paperwork together.

My local laws state that if you purchase a house with tenants, you have to follow their signed lease terms. If the lease is expired or there’s no lease, you can treat them like a month-to-month tenant.

I sent my new tenant documents to fill out with information I’d need to create a new lease. With that information, I was able to get a new lease agreement created that was a mixture of existing lease terms and brand-new information for tenant #1 to review and sign.

Once the lease was signed and active – I started to enjoy some of the benefits of buying a house with tenants.

Immediate cash flow

Part of making things better than the previous owner involved making tenant #1 send all rent payments online – instead of mailing a check or coming by every month to pick it up.

Not only did this make it easier to pay (and set up recurring transactions so she didn’t have to think about it) – she would immediately receive rent payment receipts and it improved her credit.

The benefit for me was that I now had immediate rental income before I even had to make my first mortgage payment. I think I actually received 2 months of rental income before my first mortgage payment was due.

Those 2 months of rental income paid for my first month’s mortgage and after the 3rd month’s rent – there was enough rent in the account to pay for my second month’s mortgage as well.

So, while I became the new owner in June – I didn’t come out of pocket for the mortgage until November.

And if you’re wondering why I had to come out of pocket for the mortgage at all for a rental property, don’t forget that I made the vacant unit my primary residence (basically house hacking).

Recommended Reading: House Hacking Guide

Years later

I’ve owned that rental property for just about 4 years now (I no longer live there) and tenant #1 still lives there.

She’s paid her rent on time every month and I’ve done the work necessary to provide a safe and habitable property (including excavating and waterproofing 200 linear feet of foundation).

While the property has a nice cash flow on a monthly basis, the finances overall will be “in the red” for a few years. The work that I’ve done to the property has definitely increased the property value but, unless I sell, it’s just a number on a piece of paper.

So, for the time being, I’m enjoying the benefits of front-loading that work – which makes self-managing that rental property extremely easy.

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