Savvy investors have long turned to real estate as a solid way to build long-term wealth. Some purchase properties and remodel them on the chance that they may be able to flip them for a higher price. Others use a more long term investment strategy of buying turnkey rental properties and renting them out to generate passive income.
When looking for rental properties to add to your portfolio, one of the questions that you’ll eventually face is whether vacant or occupied investment properties are the best choice to help you achieve your goals. Especially if investors are new to owning and managing rental properties, they may feel uncomfortable with the idea of purchasing a property that has tenants already in place. While there can be some cons to this type of purchase, there are quite a few benefits to opting for occupied investment properties.
Pros of Occupied Investment Properties
One of the most obvious pros of choosing an investment property that’s currently rented out is you don’t have to search for tenants. This can be a lengthy process as you market the rental, work to attract tenants, and interview applicants. Meanwhile, the property sits empty — creating expense while creating no income to cover it.
Another benefit to purchasing a property with a tenant already installed is that it leaves no doubt that the property is rentable. This is a big question when diving into the rental investment property world: is a property in a good location and does it feature enough amenities to attract renters and draw the amount of rent you’ll need to take care of expenses (and even make a profit)? When you opt for an occupied rental property, there’s no question about the potential. You’re purchasing a business that’s already in motion, with no concept of what you “might” be able to make — you simply take over the current lease and accept rental payments.
Finally, properties that sit vacant are prone to problems related to disuse and may have lots of deferred maintenance. If renters are actively living in a property, there’s a greater chance that it’s being cared for appropriately and that the current owner is an excellent landlord. Of course, it’s always a good idea to have an inspection, but with someone residing there, you can feel more comfortable that the property won’t be plagued with issues like HVAC problems, major appliances that don’t work, leaks, and other factors that would make the property unrentable.
Cons of Occupied Investment Properties
When it comes to making smart investments, there are very few cons to choosing an occupied property. The most common drawback is that an occupied property will typically fetch a higher price than a vacant one. Some investors may seek out vacant properties in order to score deals on rentals that have lacked the proper care, maintenance, or possibly marketing.
This can be a gamble, however. A property that’s been sitting vacant smacks of desperation, making it an excellent target for buyers. That same problem will still exist, however, when you turn it around and try to market it as a rental. If a property has been vacant for a long period of time, it may raise questions in the minds of potential renters. Is there some problem with the unit or the building overall? Is there crime in the area? Why have other renters taken a pass on signing a lease? That concern alone can make it worth paying more for an occupied investment property.
What if you inherit problem tenants from the previous owner, however? This is a very real potential drawback to buying a rented property, and it’s also why many investors opt to use a property management company to manage everything from communication with tenants and accepting payments to handling evictions should major problems arise.
While the cons can be concerning, most investors who are focused on building a rental property portfolio aren’t deterred by them. They prefer to hit the ground running with each property acquisition, making occupied investment properties the best strategy for passive income generation