Inheritances can be messy ordeals. Trying to figure out how to distribute someone’s assets after their death can be a confusing process (even if they’ve outlined their desires in a will), and after that, you might end up with an asset you aren’t sure how to manage or sell. That’s on top of dealing with the emotional burden of losing a loved one.
Inheriting property is somewhat common. You might acquire your parent’s home when they pass, or a piece of property they were trying to fix up. But you might also inherit a rental property, or an entire portfolio of rental properties. Some of those properties might even have a tenant, or multiple families living in them.
What’s the best way to handle this situation?
Understanding Rental Property
First, you should have a basic understanding of how rental property works, and how your relatives used their specific rental properties. There are several motivations for owning rental property, most of which are designed to give you a financial advantage. With the right investment, you should be able to collect more in rental income from your tenants than you’re required to pay in ongoing expenses; this results in a stream of income that can supplement your main salary or, if you have many properties, allow you to retire and subsist entirely on rental income.
In other cases, rental property is acquired with the intention of an eventual profitable sale. The idea is that property values in most desirable neighborhoods increase consistently over time; collecting rental income can help you cover the maintenance expenses associated with a property, breaking even until you sell the home for a profit.
Ultimately, you’ll do one of a few things with this property:
- Keep it and collect rental income. You could keep this rental property active and keep the status quo. If this is the case, you’ll be required to pay ongoing expenses like insurance and property taxes. In exchange, you’ll get the benefits of ongoing monthly rental income (assuming the tenants are reliable). While this is often a favorable situation, be aware that you’ll also be taking on significant responsibilities as a landlord.
- Keep it and move in. If you like the shape of the property and you’ve been considering a move, you could plan to move into the property. Be aware that depending on your area, the tenant may still have occupancy rights; if you want to move in, you may have to provide notice to the tenant far in advance of your move-in date.
- Sell it immediately. If you’re looking to dump the property as quickly and painlessly as possible, you’ll probably want to sell the property immediately. You can sell rental property with tenants still living in it; in fact, this often comes as an added incentive to the buyer. You’ll turn a quick profit, the existing tenants can continue living in the home, and you won’t have to worry about it anymore.
- Sell it eventually, with profit in mind. If you’re interested in selling the property for the highest possible price, you may need to do some work and/or be patient with it. Allowing a few years for the neighborhood to develop or applying some major renovations can allow the property’s value to skyrocket.
How are you supposed to make this decision?
Start by taking inventory of the property or properties you inherited. Look at the specs. Determine whether there are existing tenants living in those properties. Do some research on the neighborhoods they’re in, and talk to a real estate agent if you can. Most importantly, tour the properties in person to determine their condition. This will give you a better idea of what you’re dealing with. For example, you might learn that the property would be extraordinarily hard to sell as is, or you might learn that your tenants signed up for a 3-year lease that just started, complicating matters.
Determine Your Goals
Next, think carefully about what your goals and priorities are.
- Some people who inherit property want to make things as simple as possible. Others are willing to invest more effort upfront. If you’re trying to minimize the number of hours you spend on this property, your best bet could be selling the property outright. If you’re willing to put in a lot of work, you might take over landlord responsibilities. If you’re somewhere in the middle, you might consider keeping the rental property but hiring a property management firm to handle most of the day-to-day upkeep.
- You might also prioritize profit. If you’re trying to accumulate wealth or if you’re trying to get as much as you can out of this property, you’ll want to do a thorough financial analysis of its current situation and future possibilities. In many cases, your best bet will either be maximizing the income you can get from tenants, or making changes that increase the total value of the property over time. Either way, you’ll have to put in extra work, and you’ll end up holding the property for several years.
- You may also have a sentimental attachment to the property for one reason or another. This might be your childhood home, and you could imagine raising a family in it one day. Your parents could have wanted you to assume landlord responsibilities after their passing. You could just want to keep the property as a way to remember them. Don’t ignore these feelings; they can and should factor into your decision.
No matter which way you’re leaning, it’s important to talk to different professionals in the industry so you have a better understanding of how each decision could work.
If you’ve inherited a rental property, or believe you will in the future, and you aren’t sure what to do with it, contact Green Residential today! We have the right people who can help you sell the property or manage the property, should you choose to become a landlord and take over property management responsibilities.