The Pros and Cons of Buying a Renter-Occupied Apartment

Q: We are considering buying a tenant-occupied apartment in a condo. The tenant has lived there since August 2019 and the lease at market price will expire in four months. The seller’s agent said he could deliver the vacant apartment, but that we would have more influence on the sale price if we kept the tenant. We visited the apartment and the tenant kept everything clean and in good condition. We are in no rush to occupy the apartment and it would be nice to have some income in the meantime. What are the pitfalls we need to be aware of before making this decision?

A: If you want to use the apartment as an investment property, having a reliable tenant saves you the time, stress and cost of finding a new one. It also provides continuity for the existing tenant – they don’t have to move out if you plan to rent the apartment anyway. But if you want to live in the apartment and see renting as a short-term way to save on some upfront costs, you need to weigh the risks against the benefits.

“It’s all about risk tolerance and how badly you want the space four months from now,” Lucas A. Ferrara, a Manhattan attorney who specializes in landlord-tenant law.

Under New York State law, a tenant who has lived in an apartment for two years or more must be given 90 days’ notice if the lease will not be renewed. So there is a countdown – the current landlord has to start this process soon enough, if you want the apartment to be delivered vacant when the lease expires.

The tenant can leave quietly at the end of the term. But the rental market is currently competitive, with rising rents and low inventory. The tenant could, in theory, challenge the termination of the lease and refuse to leave. Worst case scenario: You end up in a protracted eviction case that lasts for months and costs you a lot of money and stress.

“A bad landlord-tenant deal can cost tens of thousands of dollars,” Ferrara said, and last a year. “It can be quite expensive.”

Do the math. What is the discount on the sale price of a tenant-occupied apartment? To what extent will the rental income of these first months compensate for your other expenses? Is the margin large enough to justify the risk if your relationship with the tenant deteriorates? You should also consider whether you want to be a landlord, even for a few months, and be the person to end someone’s lease.

For weekly email updates on residential real estate news, register here. Follow us on twitter: @nytrealestate.