One of the most common scenarios in which people unexpectedly find themselves thrust into the position of becoming a potential landlord is by inheriting property. Just because it hasn’t happened yet, becoming the heir to your parents’, grandparents’ or other relative’s home can easily happen to you. Regardless of the current state of the “FED” (the board that oversees the Federal Reserve Banks and ultimately determines national interest rates) people are unfortunately continuing to die at the same daily rate – and whether you inherit a property in its entirety or as a percentage that is shared among other family members, the first mistake that people invariably make is to liquidate the property for immediate cash without considering the long-term benefits of what would happen were you to rent it out.
If the interest in the property is divided, then expect some friction from those “ever-friendly” family members who exhibit no ability to reason when presented with the option of receiving immediate cash on hand, as opposed to foreseeing the property’s greater value as an investment in their future. This is when you will have to lasso everyone together with a great level of enthusiasm and some easily digestible facts and solid figures depicting the significantly larger pile of cash that awaits them.
And while it is true that not every property is worth holding on to, it can be easily determined if there is more than just sentimental value or your family’s heritage at stake.
Ask yourself this one simple question: What is the condition of the property? If you feel neither confident nor skilled enough to answer this question on your own, then hire a licensed home inspector. It’ll cost you only a few hundred dollars for invaluable knowledge as to whether you have a real investment opportunity or a money pit on your hands.
As a general rule, if the cost of needed repairs or improvements doesn’t exceed the equivalent of one year’s worth of gross rental income, the property may well be worth retaining and renting. It is then generally accepted that if you are short on cash, you may want to reconsider.
However, there are ways of raising the extra money for repairs and improvements – including refinancing the property and taking cash out of it – but this chapter is intended to simplify the process with a few basic guidelines as opposed to complicating it with complex and convoluted financial maneuvers. If you insist, you are always encouraged to take a pencil and paper and do the numbers to see if you can add them up in your favor. Just be sure you ask yourself these questions when taking additional risks:
1. How long do you reasonably expect to hold on to the property and, in the end, will it have been worth the effort, time and money?
2. Can you safely refinance and pull enough cash out of the property to make the necessary repairs and improvements without being severely penalized with a costly mortgage that you will live to regret?
3. Will the newly improved property be able to command enough rent to cover the new mortgage payment or can you stand to lose each month, hoping the property will appreciate enough over time to offset the monthly loss?
You may be wondering why only these three questions regarding additional risks were posed. Quite simply, all other issues you’re likely to encounter are actually very easy to manage with the help of American Landlord and may just confuse and complicate the basic decision-making process at this point.
One such example is the logistics involved in managing the inherited property if it’s located out of state. Even if you are an “absentee landlord” (one who lives a considerable distance from the property – i.e., several hours away or more by car), you can still confidently take control of the unit, market it, repair it and continue to fill it with the best of tenants.
So let’s begin by looking at exactly why you should hold on to that inheritance and opt to rent it out. Aside from the sentimental value and family heritage, there are three wonderful things about rental property that need to be considered:
1. Positive Cash Flow: As long as the remaining mortgage is minimal, the property is in good condition and the taxes and insurance are not increasing exponentially every year (as they do in Florida, Louisiana and many other states), never pass up the opportunity for extra monthly income. If you do, you will assuredly regret that decision when you finally stumble upon a calculator and do some basic math.
Rental payments are like social security checks – they’ll continue to be there as long as the property is carefully handled and not mismanaged. Granted, anything can go wrong with a property or a tenant at any time, but in the long run, you can count on a solid return from your investment – or at least a place to live if your personal life falls apart and you can no longer afford your primary residence… Sorry, it happens – and your forethought suddenly becomes an absolutely priceless fallback.
2. Appreciation: Generally speaking, property values will climb – you will know if your area is too distressed or problematic to consider. Some properties appreciate rapidly, others slowly – the important thing is to stick with it for the long haul and you should do just fine. In fact, most people that keep inherited property make out a heck of a lot better that those that cash out and typically go on a spending spree.
Real estate is a great savings tool that also offers a valuable lesson in self-discipline. If your money is tied up, you can’t spend it – and if someone else is paying you for the use of your property, you might as well jump on and enjoy the hayride. DON’T FORGET: The only time you have to plan for the future is “now” – once the future becomes “now,” it’s already too late!
3. Income Tax Advantages: While this is not a volume on American Accounting, needless to say, there are many creative ways to lower your income tax burden by correctly depreciating income and attributing expenses to your rental property. Any Certified Public Accountant (CPA) can help you on this matter; it is strongly recommended that you seek their advice.
It’s well worth spending hundreds of dollars to save yourself thousands, by taking full advantage of the elaborate and confusing tax code that was created specifically to protect those few individuals fortunate enough to own property of significant value.
So the next time you inherit a relative’s property, don’t be quick to cash out until you’ve accurately assessed whether you might be able to bank upon your brand-new asset each and every month for years to come.