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Typically, when you are looking to buy a property, there are two main parties involved – the buyer and the seller. However, occasionally you will run into scenarios where the house you are looking to purchase is currently home to a tenant.
Now, navigating the purchase of the property is going to be much more complicated. This is because you are going to have to navigate more obstacles than you otherwise would have with a vacant home. Naturally, if it is your first time buying a tenanted property you may have questions about how their lease affects your purchase and when and how you can evict the previous tenant.
So, in order to help you navigate the buying a tenanted property and your next steps, here are some important things you should consider.
However, before you look at buying a tenanted property, it can be helpful to see how lenders look at these properties and how they valuate them. So, in order to help you get started, click the link below to book a free strategy call with our team at LendCity today.
Understand the Tenant’s Rights
In Ontario, tenants have a number of rights in order to help protect them from unlawful rent increases, evictions and entry. This means when you are looking at buying a tenanted property you will not have full access to do whatever you want with the property straight away. Instead you will have to coordinate with the existing tenant any of your plans for the property.
For example, if you plan to renovate a property you have bought and require the tenant to vacant the property for the duration of the work, you are free to temporarily evict the tenant for any construction or updates to be completed. However, this is only a temporary eviction, and you must provide the tenant with the right to move back into the property at the exact same rental rate they had previously been paying. Despite this, to reoccupy the unit once the renovations are complete, the tenant is required to provide written notice of their intention to move back into the property along with their current address.
In order to do this, you must provide them with a minimum of 120 days’ notice and an N13 form, with the termination date set as the last day of the rental period. However, a tenant is permitted to terminate their own tenancy before the end of those 120 days by choosing to provide you with an N9 form and at least 10 days notice.
Acknowledging The Current Lease
Another important consideration when you are buying a tenanted property, are the details of the current lease agreement. This is because when you buy the property, you are not only claiming ownership of the house itself, but you are also assuming responsibility for the tenant’s lease. This means that for the rest of the current term. Once that term expires if the tenant chooses to renew the lease, you will then be able to renegotiate the terms of the lease.
This also means that you will have to act under provincial guidelines for increasing the rent at the end of the term and will only be able to adjust the rent by the current provincial guidelines. At the time of writing this article, the province limits rent increases to a maximum of 1.2 per cent every 12 months.
Discover How To Buy Unlimited Rental Properties With This Step By Step Guide
If You Plan to Find a New Tenant
If you do not intend to move forward with the property’s current tenant, you will have to find a way to incentivise the current tenant to move. The most common way people handle this situation is to offer a cash incentive to the tenant, however some tenants will require further convincing. Once you have come to an agreement, the tenant will need to sign an N11 form (an Agreement to Terminate Tenancy) to make it official.
Alternatively, if the tenant you are hoping to bring in is a family member, you do have the choice of providing 60 days’ notice, filing a N12 form, and compensating the tenant with an amount equal to one month’s rent. However, under this circumstance, you will have to ensure that whoever inhabits the property stays for at least one full year without moving or else you will face a penalty from the Ontario government. If you have not already assumed ownership of the property, you can ask the seller to provide the tenant with this document on your behalf.
If You Plan on Moving In After Buying a Tenanted Property
If you are buying a tenanted property with the intention of moving in, you must be aware you typically will not be able to move in straight away. In Ontario, you cannot legally evict a tenant to make room for yourself, nor can you ask the previous owner to do so. If there is a tenant currently leasing the property, you are going to have to wait for that lease to expire.
However, if you are set on moving into the property and do not want to wait, you can make it clear in your offer you desired move-in date. If your offer is appealing enough to the seller, they could try to incentivise the current tenant to terminate their tenancy with a monetary incentive. Otherwise, when you assume ownership of the property, you can attempt to incentivise the current tenant as well, of course this will take longer than convincing the previous property owner to do it for you, delaying your move in date.
In the case of tenants who rent month-to-month, you will be required to provide them with 60 days notice, an N12 form and one month’s rent worth of compensation.
The Advantage of Buying a Tenanted Property
One of the key advantages of buying a tenanted property is the fact they are occasionally easier to finance. Since you are buying a property that is already generating cash flow, many lenders will consider it a much safer investment to finance, as they will be able to see how much rental income the property currently generates and be assured you are much less likely to default on your mortgage.
If you are looking at buying a tenanted property, or simply would like some more information, call us at LendCity. We can be reached at 519-960-0370 or you can find us online at LendCity.ca Alternatively, click the link below for a free strategy call.