Things to know before buying a resale property with an existing tenant

Purchasing a resale property offers many advantages for buyers, such as immediate possession and established neighbourhoods. Many buyers prefer investing in properties with existing tenants, especially in big cities with strong rental demand. This gave them the advantage of ready rentals without incurring any broker fees or platform fees to find tenants. A common question for most resale homebuyers is whether the tenancy ends after they purchase the property. The answer is no. The tenancy will not end automatically; however, if the new buyer wants to end the tenancy, they must follow the due legal process. In this article, we explore common scenarios arising from purchasing a resale property with existing tenants and share useful tips for buyers.

Overview of properties with existing tenants or preleased properties

A pre-leased property refers to any commercial or residential property that already has an existing tenant with a valid lease. When the new owner buys the property and there is a tenant occupying it, the lease signed by the previous owner continues even after the change in ownership. The new buyer msut adhere to the terms of the existing tenancy agreement, subject to local rental laws.

In major metropolises, preleased properties are a popular investment option, as there is steady demand for rental properties and buyers find it convenient to invest in a property with an existing tenant. It eliminates vacancy risk and potential losses for the buyer while providing them with immediate rental income.

Benefits of buying a resale property with an existing tenant

• Immediate rentals: Buying a resale property with an existing tenant allows the new owner to earn rental income from the date of purchase.
• No vacancy period: If a property remains vacant, it can lead to significant expenses for the buyer towards maintenance, repairs, etc. Finding a tenant through a broker or other platforms will also lead to expenses. All this will be eliminated if the property already has an existing tenant.
• Beneficial for investors: Buying a preleased residential property is advantageous from an investment point of view, especially if it is a long-term rental and not for self-occupancy.  

Are home loans available for resale properties with existing tenants?

Banks and lending institutions generally provide home loans for tenanted residential properties, provided the properties have a clear title and all relevant documents have been verified. The process of securing home loans for such tenanted properties will be similar to that of any other residential property. However, lenders may verify rental agreements and related documents to assess risk before sanctioning a home loan. It is worth noting that lenders prefer stable tenancies with longer tenures and reliable tenants. Typically, banks consider the rental income generated from the lease into account when approving the loan, and it may boost the buyer’s loan eligibility.

When to avoid buying a house with an existing tenant?

Purchasing a property with an existing tenant does not make sense in the following scenarios:

•   If the property is for end-use and required for immediate self-occupancy
•   In case the tenancy terms are unclear or there are ongoing disputes
•   If the tenant has a track record of non-payment of rent or conflicts
•   If the eviction processes are legally complex

Financial and tax implications of buying a property with an existing tenant

Tax on rental income

Rental income from the property will be taxed under the head ‘income from house property’, and buyers must correctly report it in the relevant ITR form. It is important to note that the security deposit collected from the tenant is not considered as income unless it is adjusted against rent.

Home loan benefits

The buyer will enjoy tax benefits as applicable for other resale properties. These include tax deductions for principal repayment and interest on a home loan for a rented property.

Stamp duty and registration charges

Buyers are required to pay stamp duty and registration charges at the applicable rates in the relevant state where the property is located.

Tips for buying a resale property with an existing tenant

Purchasing a resale property with an existing tenant needs careful planning from the buyer. In addition to verifying the property title and conducting other legal and financial due diligence, the buyer must ensure that the tenancy details are clearly stated in the sale deed. Buyers also need to get written confirmation for the security deposit transfer.

Moreover, if there is an ongoing dispute between the previous landlord and the tenant, the new buyer needs to navigate this stage carefully.

Some of the common issues a buyer may face with the existing tenant include:

When the tenant refuses to vacate the property

The buyer may face issues or delays if the tenant refuses to vacate the rented property. Buyers need to handle the situation by following the legal procedure, including eviction if required.

Unregistered rental agreement

There are risks for the new owner if the previous landlord and tenant did not have a formal rental agreement. A verbal agreement or an unregistered rental agreement for a tenure of more than 11 months can pose legal troubles for the new buyer. In such cases, the new buyer should sign a new rental agreement immediately after the purchase.

Who should invest in resale property with an existing tenant?

Resale properties with existing tenants may not be profitable for every buyer, especially if they want to move in. It can be beneficial for property investors who seek steady rental income. Moreover, those with long-term investment goals can invest in such properties, as they can expect higher rental yields due to capital appreciation over time. Another buyer category that can benefit from buying a preleased property is NRIs. A property with an existing tenant will be acceptable since they do not plan to occupy the property and expect to earn sound rental income. 

Housing.com POV

Purchasing a resale property with an existing tenant may be a smart investment move for a property buyer. It can benefit long-term investors and NRIs. However, end-users should avoid buying such properties with an existing tenant as the timelines regarding the end of tenancy and possession may differ, causing delays for the owner. Moreover, such investments may also involve certain risks if the buyer fails to conduct proper due diligence. Consulting a property lawyer can help buyers, especially first-time buyers or entry-level investors with limited exposure to the resale residential market.

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