What to consider when purchasing a property with a tenant.
For many buyers, purchasing a home with a tenant is a conscious decision to invest and have some extra earnings at the end of the month.
Others may find it difficult to purchase a rental property if, for example, their intention is to live it or to monetize it in some other way. Some people consider renting out their spare rooms to students or even using their home as a holiday rental at certain periods of the year.
The truth is that international investors have never found the portuguese real estate market to be more alluring than now, and even local buyers (especially those who own second homes) view real estate investing with favour and as a method to supplement their monthly income.
There are, however, a few considerations you should bear in mind when purchasing a home with a tenant. In this article, we will try to answer the most commonly thought about questions.
Before continuing, it is crucial to note that the most recent change to the New Urban Lease Regime (NRAU), granted tenants (especially the most vulnerable) improved protection to give them more security in the lease and also remedied several instances of imbalance between tenants and landlords.
With the most recent modifications to the NRAU, improved tenant protection includes:
Special protection for tenants who are more at risk, such as those who are over 65, disabled (with a disability degree of more than 60%), and whose lease agreements date back to before 1990;
The right to a reimbursement for the costs of urgent renovation work - renters have this right to make (urgent) renovations to the property without the landlord's involvement and receive a refund;
New minimum lease terms - a lease's previous minimum duration was one year, with renewals occurring every three years (unless both parties reach an agreement in other terms). This means that it might be challenging for you to live there temporarily if you purchase a home with a renter and a recent lease;
Access to a programme for affordable rentals - the establishment of this programme makes it possible to rent homes for less money (about 20% of what is charged in the market).
However, this most recent change to the urban rental law also benefits landlords, particularly through the introduction of tax incentives that support long-term rentals. As a result, if you are thinking about purchasing a home with a tenant, your tax situation will be better if you favour long-term leasing.
5 things you have to think about when purchasing a home with a tenant
Regardless of your circumstance or goal, consider the following factors before purchasing a home that is already leased:
1. Request a copy of the lease and evaluate the business's feasibility.
If the goal is to live on the property in question, this aspect is especially important. It is crucial that you obtain a copy of the lease agreement and carefully read it before concluding the transaction because the New Urban Lease Regime has improved tenant protections. You could have to wait up to three years before ceasing the lease agreement.
2. Be familiar with all lease reporting requirements
Lease agreements allow for the termination of the agreement under specified circumstances (and there are many). First, this can be done if the landlord has owned the property for more than two years, has no other home in the same county that fulfils his/hers housing demands, and there is a need to use the property for personal dwelling (or for the residence of first-degree descendants).
The landlord must pay the tenant the equivalent of one year's worth of rent in order for the landlord to use their right of use of the property.
In fixed-term lease agreements, the landlord must also adhere to the legally established dates for notifying the lessee of his or hers desire not to renew the lease.
One third of the original length of the contract or its renewal for contracts that are less than six months;
60 days for contracts that are between one and six years in length;
120 days for contracts that are six years or more;
240 days for contracts that are greater than six years.
The eviction date must always be stated in the letter, which is requiered to be sent to the tenant.
3. Verify that there are no life leases on the property.
It will be crucial to review the lease length if you want to purchase a home with a tenant. The urban lease may last up to 30 years. However, it is crucial to determine whether the property is subject to any Real Enduring Housing Rights (DHD). This actual right can in fact result in a perpetual lease.
The Real Enduring Housing Right permits one or more persons to live in a home permanently and for life in exchange for making monthly payments to the owner and a one-time security deposit.
This indicates that the owner of the property will not be able to end this kind of contract if the holder of the right satisfies all of his duties.
This Royal Enduring Housing Right may only be terminated if the rightholder so desires. Upon the death of the rightholder (or the last holder), or with the occurrence of a recurring default (e.g. a recurrence of delays or non-payment of the amounts due).
As an owner, be aware of the terms that may cause you more problems and limit your options for managing and using the property.
4. Verify that no one is residing in the home without a lease.
All leasing agreements must be in writing and a register of the landlord's revenue must be registered with the Tax Authorities. However, in reality, these agreements are occasionally carried out informally between an owner and a tenant (a situation that leaves both parties less protected).
If you purchase a home with a tenant but discover there is no written lease, he/she will need to prove that they have lived in the property for at least six months and that they have been paying rent. In these circumstances, the lease contract must be incorporated into the purchase with an undetermined date.
5. Determine whether any of the tenants are older than 65.
Finally, it is advisable to ascertain the tenants' age group before renting to them. This is so that tenants who have leases that began before 1990 and who are 65 years of age or older or who are disabled may not be evicted in any way, according to recent modifications to the urban rental law. The same holds true for those who have rented the property for more than 15 years.
Only demolition or urgent rehabilitation work under these circumstances makes it possible to terminate the contract. Such a contract might be a hindrance if your goal is to live there.
Can you ever sell a rental home again?
You can sell a home again if you purchase one with a tenant already living in it. It must always express its goal in writing to be considered official.
Please be aware, though, that if a property has been rented for longer than two years, the tenants should have first dibs on buying it. To this aim, it is sufficient for your written letter to contain the contract's terms and all pertinent details about the sale procedure. The tenants have 30 days to respond, and if they do not, you can then move forward with selling the property to a third party.
And we advise you to retain the crucial assistance and knowledge of a real estate adviser whether you are buying or selling a property with a tenant.