Buying a Property with Tenants in Place: What You Need to Know

Buying an investment property with existing tenants can be an appealing option. The rental income starts from day one, the property has a demonstrated rental history, and there is no vacancy period while you find a new tenant. But purchasing a tenanted property also means inheriting a legal relationship governed by the Residential Tenancies Act 1986 (RTA), and the obligations that come with it are binding on you as the new owner from the moment settlement occurs. At Chaperone, we encourage buyers to understand exactly what they are taking on before going unconditional.

Your Obligations Under the Residential Tenancies Act

The Residential Tenancies Act provides strong protections for tenants, and a change of ownership does not alter a tenant's rights. As the new landlord, you inherit the existing tenancy agreement in full, including the agreed rent, any conditions, and the notice periods that apply. You cannot simply ask tenants to leave because you have purchased the property. Terminating a tenancy requires giving appropriate notice under the RTA or meeting specific grounds for termination, and the process must follow prescribed steps.

Periodic tenancies, which continue week to week or fortnight to fortnight without a fixed end date, can be ended by the landlord with 63 days' written notice in most circumstances. Fixed-term tenancies cannot be terminated before the agreed end date except in limited circumstances such as a mutual agreement or a successful Tenancy Tribunal application. It is important to know which type of tenancy is in place before you complete your purchase.

Reviewing the Existing Tenancy Agreement

Before going unconditional, you should request a copy of the current tenancy agreement as part of your due diligence. Review it carefully for the weekly rent amount, whether the tenancy is periodic or fixed-term and if so when it ends, any agreed conditions or provisions that carry over to you as the new landlord, and the current bond amount held. The bond should be lodged with Tenancy Services (the government agency that administers tenancy bonds), and you can request confirmation of this.

It is also worth understanding the current state of the tenancy: have there been any disputes, rent arrears, or Tenancy Tribunal proceedings? Your solicitor can assist in requesting disclosure from the vendor about any known issues or outstanding matters relating to the tenancy.

Rent Reviews and Existing Rent Levels

When you buy a tenanted property, you take on the tenancy at the existing rent level. Under the RTA, rent can only be increased after a minimum period (currently 12 months from the last increase or from the start of the tenancy), and only after giving the required written notice. You cannot increase the rent immediately after purchase simply because you have become the new landlord, and you cannot increase it to market rates if it is not yet due for review under the legislation.

If the existing rent is below current market rates, factor that into your investment calculations. It may be some time before you can adjust it, and even then any increase must comply with the process set out in the RTA.

Entry, Inspections, and Notice Requirements

As a landlord, you have the right to inspect the property and carry out maintenance, but you must give tenants appropriate notice as required by the RTA. For a routine inspection, you must give at least 48 hours written notice, and inspections can only take place at a reasonable time. These rules apply from day one of your ownership, so it is worth familiarising yourself with the notice requirements before you take possession.

How Lenders View Tenanted Properties

From a lending perspective, buying a tenanted residential property is generally treated as investment lending. This means stricter LVR requirements typically apply, usually a minimum 35 percent deposit under current RBNZ restrictions, along with higher interest rates than owner-occupied borrowing. Lenders will assess rental income as part of your serviceability, though they typically apply a discount to the gross rent, often accepting only 70 to 75 percent of the market rent, to account for vacancy and management costs.

Providing evidence of the existing tenancy, including the tenancy agreement and recent rent receipts, can support your application and help demonstrate the income the property generates.

Getting the Transition Right

When settlement occurs, notify the tenants promptly in writing that ownership has changed and provide your contact details and preferred communication method. This sets a professional tone from the outset. If you intend to use a property manager, introduce them and their contact details at the same time. At Chaperone, we can help you think through the financial side of buying a tenanted property and connect you with a mortgage adviser who has experience with investment lending in New Zealand.