What Due Diligence Looks Like for a Property With Existing Tenants

Six years ago I bought my fourth property with two tenants already living in it, and I learned the hard way that due diligence on an occupied building is nothing like due diligence on an empty one. The seller told me both leases had two years left and rent was 82,000 yen a month per unit. Neither was true, one tenant had a month-to-month agreement that could end with 30 days notice, and the actual rent on file was 74,000 yen after a discount the seller never mentioned. That gap alone cost me almost 200,000 yen in lost income over the first year while I sorted it out.

Buying a tenanted property can be smart, you skip the vacancy period and start collecting rent from day one, but only if you verify what you are actually buying instead of trusting the sales sheet. Here is the process I now run on every occupied property before I sign anything, built from a handful of expensive lessons.

Start with the lease, not the listing

The first document I ask for is not the rent roll, it is the actual lease contract for every unit. I have seen listings advertise a 2-year fixed-term lease when the real contract was a standard renewable lease with an entirely different notice period. In Japan the distinction between teishaku (fixed-term) and futsu (standard, renewable) leases matters enormously. A standard lease tenant can be very hard to remove even if you want to renovate, while a fixed-term lease simply ends on its date. On one 6-unit building I nearly bought, four of the six were standard leases dating back 11 years, which meant I would have almost no ability to reset rents to market for years.

Walk the unit while someone still lives there

I always ask the seller to arrange an inspection with the tenant, even if it means offering the tenant a small thank-you, usually around 5,000 yen in a gift card. You cannot judge plumbing, mold, or wear on an occupied unit from photos alone. On a property I inspected last year, the hallway looked fine in every listing photo, but inside the unit there was a water stain spreading across the ceiling from a bathroom fan that had never been vented properly, a repair I priced at roughly 140,000 yen once I factored in re-plastering and repainting. That number went straight into my offer as a price reduction, and the seller accepted it without much argument.

Check the numbers against reality, not the pro forma

Every occupied property comes with a pro forma that assumes full occupancy and on-time payments. I ask for 12 months of actual bank deposit records for the rent account, not just a rent roll someone typed up the week before listing. This is where you find the tenant who is consistently 10 days late, or the unit that has been vacant for 3 of the last 12 months but is still listed at full occupancy. I also request the security deposit ledger, shikikin, and more than once I have found that a deposit the seller claimed to be holding had already been spent on repairs. That shortfall becomes my liability the moment I take over as landlord, so I always price it into the offer.

Talk to the tenant if you can

Sellers often resist this, but a short conversation with a current tenant tells you things no document will. Ask how often repairs get handled, whether the current owner is responsive, and whether they intend to renew. On one deal, a tenant mentioned casually that they were planning to move out in 3 months regardless of who bought the building, information that let me negotiate an extra 300,000 yen off the price since I would be facing a near-term vacancy and turnover costs I had not budgeted for. A five-minute chat saved me from a nasty surprise two months after closing.

Confirm what you are inheriting, not just what you are buying

When you buy an occupied property in Japan, you generally inherit the existing lease terms whether you like them or not, including any special conditions the previous owner agreed to, a reduced rent for the first year, a pet allowance, a parking spot thrown in for free. I once discovered after closing that the previous owner had verbally agreed to cap a tenant’s rent increase for 5 years. Nothing was in writing, but the tenant produced a text message thread proving it, and I honored it to avoid a drawn-out dispute that would have cost more than the lost rent. Get every side agreement in writing from the seller before closing, even the ones that seem minor at the time.

My pre-purchase checklist

Here is what I go through on every tenanted property now, without exception:

• Full lease contracts for every unit, not a summary sheet
• Twelve months of actual bank deposits for rent, cross-checked against the rent roll
• Security deposit ledger and confirmation the funds still exist
• Unit walkthrough with the current tenant present
• Written list of any side agreements, discounts, or verbal promises made to tenants
• Direct conversation with at least one tenant when the seller allows it
• Confirmation of lease type, fixed-term versus standard, for every unit

None of this takes more than a week if the seller is cooperative, and a seller who resists a basic checklist like this is usually telling you something. I have walked away from two deals purely because the seller would not produce bank records for the rent account, and both times I later heard through other investors that the buildings had serious occupancy problems. That is the discipline I now apply across all 9 of my properties, and it has saved me far more in avoided mistakes than the week or two it costs upfront.

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