Many people want to invest in property and are considering buying a flat to rent out. Within this group, some focus on properties that already have tenants in place, allowing them to generate rental income from day one. But is this a good strategy?
Here's everything you need to know about buying a property with a tenant in situ.
- Tenant's right of first refusal
- Right of withdrawal: when a sale takes place without complying with the LAU
- Does the tenant always have priority?
- Do you have to honour the rental contract if you buy the property?
- What to consider before buying a rented property
- Advantages of buying a property with a tenant
- Drawbacks to consider
- How to calculate returns
Tenant's right of first refusal
Under Article 25 of Spain's Urban Leases Act (LAU), a tenant generally has priority to purchase the property if the owner decides to sell.
If the owner wishes to sell, they must notify the tenant of the proposed sale, including the price and main terms. The tenant then has 30 calendar days from the day following notification to decide whether to exercise this right.
It should be noted that any co-owner of the property takes priority over the tenant.
As the legislation also states, when a rented property is sold, registration of the sale at the Land Registry requires proof that the tenant has been properly notified. This serves as confirmation that the tenant's rights have been respected.
Right of withdrawal: when a sale takes place without complying with the LAU
The right of withdrawal applies when a property has already been sold, but the tenant was not given a proper opportunity to exercise their right of first refusal.
This may occur if:
- The landlord did not notify the tenant of the sale.
- Notification was given, but key information was omitted.
- The property was ultimately sold for a lower price than the one communicated to the tenant.
- The final terms of the sale were more favourable to the buyer.
In these situations, the tenant may have the right to step into the buyer's position and acquire the property under the same conditions. They have 30 calendar days from the date on which the buyer formally notifies them of the purchase to exercise this right.
Does the tenant always have priority?
No. A co-owner always has priority.
In addition, the tenancy agreement may include a clause in which the tenant expressly waives this right. If such a waiver exists, the tenant cannot exercise the right of first refusal or withdrawal.
Do you have to honour the rental contract if you buy the property?
Generally speaking, for tenancy agreements signed after March 2019, once you purchase the property you become the new landlord and must honour the terms of the agreement, including its duration, rent and contractual clauses.
If the tenancy agreement was signed between 6 June 2013 and 6 March 2019, the purchaser may benefit from rules introduced by the 2013 reform of the Urban Leases Act. Under those provisions, the buyer was not necessarily required to honour the tenancy agreement if it had not been registered at the Land Registry.
In both cases, once the agreement expires and provided all legal requirements are met, the tenant must vacate the property unless an extension applies. Where the landlord is a company or real estate agency, tenants may have additional rights to request extensions under current regulations.
If the tenant does not leave after the relevant period, or breaches essential obligations such as paying rent or properly maintaining the property, eviction proceedings may be initiated. However, reaching an agreement through negotiation is often the preferable first step.
What to consider before buying a rented property
Before purchasing a property with a sitting tenant, it is advisable to:
- Review the rental agreement: Check the signing date, remaining term, rent, renewal provisions and rent review clauses.
- Obtain a "nota simple": This will allow you to verify the legal status of the property, determine whether the tenancy is registered and identify any issues that could affect the transaction.
- Review the tenant's payment record: Verify that there are no outstanding payments and obtain information that allows you to assess their solvency and reliability as a tenant.
- Check the deposit status: Verify the amount paid, ensure it is properly documented and confirm that it has been deposited with the appropriate authority.
- Run the numbers carefully: Don't focus solely on rental income. Include ownership costs and consider how long it may take to recover possession if you intend to occupy the property yourself in the future.
- For investors: In high-demand areas, rent on renewal generally cannot exceed that of the previous contract, subject to the applicable update, unless qualifying improvement or energy-efficiency works have been carried out, which may allow an increase of up to 10%.
- Obtain a certificate confirming that community fees are up to date to avoid inheriting unpaid charges.
- Obtain a current energy certificate.
Advantages of buying a property with a tenant
- Immediate rental income without the need to find a new tenant.
- Reduced vacancy risk during the initial months of ownership.
- A clear picture of actual returns based on rent already being paid.
- A strong payment history can provide stability and reduce investment risk.
Drawbacks to consider
- The property will remain occupied while the tenancy agreement remains in force.
- The rent may be below current market levels, reducing potential returns.
- Existing issues may transfer to the new owner, including rent arrears or disputes.
- Selling, renovating or recovering possession can be more complex, depending on the tenancy agreement and applicable legislation.
How to calculate returns
To determine whether the purchase makes financial sense, it is advisable to analyse several indicators:
- Gross yield: Annual rental income divided by the purchase price and multiplied by 100.
- Net yield: A more realistic figure that deducts ownership costs such as property tax, community fees, repairs, maintenance and other expenses.
It is also important to consider the property's potential for capital appreciation and any future opportunities to increase rent, always within the limits established by the tenancy agreement and current regulations.
For example, if you purchase a property for €200,000 that is currently rented at €850 per month:
- Annual rental income: €850 × 12 = €10,200
- Gross yield: €10,200 / €200,000 × 100 = 5.1%
If annual ownership expenses amount to approximately €2,000, the net income falls to €8,200.
The resulting net yield would be:
€8,200 / €200,000 × 100 = 4.1%
