Buy parents house for rental income or sell it?

[surpasspro]

For context I'm 52 living in NY.  I own a duplex that I live in that is paid off, so I'm house neutral with my home expenses.  My parents are 80 and when they pass their 2-family house will be left to both me and my sister (house is paid off).  They are currently renting out one of the apartments for close to $3k a month.  The house is in overall good condition with some outdated things needing replacement.  My sister more than likely wouldn't want to keep the house, so the options are to sell it or for me to buy her out.  My initial thought was for me to buy it.

I hope my parents live to 100 of course, but I'm also trying to factor this into my retirement plans.  I'm hoping to retire before 60 and closer to 55 if possible.  The house is worth close to $1M right now.  Renting out both apartments would bring in about $70k gross per year.  I estimate the cap rate at around 10 and NOI of $40k a year.  I'd need to figure out the $500k payment for the buy out and would want to aggressively pay than down within 10 years or earlier.

Pros: It would cash flow from the start and be supplemental retirement income.  The house would be kept in the family (My parents bought it in the early 70's.) and then I would leave it for my kids who are very young right now.  Id be buying a duplex in a good location for basically half off. Tax benefits (depreciation, etc.) House appreciation

Cons: Dealing with tenants; which I have some good/bad experiences with while renting my own place for the last 20 years. House is on Long Island, NY (Climate change issues in 20+ years?) Hassle factor

So the question is should I sell it when the time comes and not even deal with tenants at this stage of my life or keep it for the income even with some hassle factor?  Thanks

[aloevera1]

Being a landlord is pretty much having a business. Do you want to do it? Do you need it? Do you have enough cash reserves to deal with the issues that may arise from the older house?

Honestly, if I were a landlord at 52 I would be looking for a way to get out of it. There is a lot of hassle (and some good/back luck) involved.

You don't need to leave house as inheritance unless there is some other non-monetary reason for it. If you want to leave something behind, I am sure a lot of people would be just as happy to receive cash and not have to deal with selling the house themselves.

[Paper Chaser]

If you sell, you get $500k added to your stash that would kick off $20,000/yr income per the 4% rule.
If you buy, you pay $500k to add $70k/yr in gross income, but then you'd have to subtract debt service, property taxes, insurance, vacancy, CapEx (which could be significant early on), etc. So you'd be taking in $70k in rent, but probably spending around half of that? More?


Is the hassle of owning worth the difference between those two? $20k/yr to do nothing, or maybe $30-35k/yr to be a landlord in NY?

The insurance situations in coastal places like Florida would be giving me pause too. One day you're fine, and the next day you can't get covered without your rates doubling. It might work out, but there's some risk there for sure.

[srad]

Its way too soon to start asking this question....  Ask again when the house is yours.  Too many things are going to change over the years before you get it. 

What if they need (or want) money and take out a loan on the property?
What if you sister needs (or wants) to move into it?
What if the tenants have destroyed the inside?
There's Rent control in NY remember, what if your parents take on a tenant and like them enough to not raise the rent over the next decade or two?
What if a storm destroys it?
What if taxes and insurance get to be too much?  (as paper chaser noted)
What if you are now wealthy enough and this rental income doesn't move the needle?

[surpasspro]

I agree it may be too soon to think about it, but trying to position my assets in case I do buy it later on.  I think the biggest part of me aside from the financial aspect is the sentimental value.  My parents bought it 50 years ago, I grew up in the home and its in a good location.  My Dad took care of the place and that's where I thought it staying in the family would be worth buying it.  Its not in NYC so its not rent controlled, so that's not an issue.  NY in general does favor the tenant and I understand the hassle of landlording is real.  I guess I'll just cross that bridge when I come to it and see how I feel and how old I am and if I want to deal with tenants, etc.  thanks

[Dicey]

Being a landlord is pretty much having a business. Do you want to do it? Do you need it? Do you have enough cash reserves to deal with the issues that may arise from the older house?

Honestly, if I were a landlord at 52 I would be looking for a way to get out of it. There is a lot of hassle (and some good/back luck) involved.

You don't need to leave house as inheritance unless there is some other non-monetary reason for it. If you want to leave something behind, I am sure a lot of people would be just as happy to receive cash and not have to deal with selling the house themselves.

F-U-U-U-C-K! We're in our mid-to-late '60's and we have no intention of selling our rentals. I find it humourous that since they're in a lovely Senior Community, we're considered "young."  Our youngest tenant is 71, and the oldest is 88. We love 'em all.

[Villanelle]

You aren't buying it for half off.  You could either walk away with $500k in cash that you could invest elsewhere, or you can walk away with $0, plus owing someone $500k.  (You are either positive 500k, or negative $500k.)  So the house is costing you the full $1m as your net worth will be $1m less if you don't keep/buy the house.  Don't fool yourself that it isn't.   (ETA:  Saying "your net worth will me $1m less isn't accurate.  Your NW will be about the same.  But you'll have $1m less in other assets, just like you'd have $1m less in other assets if you went out tomorrow and bought a $1m house that wasn't from family.)

Also, you mention leaving this to your kids.  There's every chance they won't want it, and also a good chance that they will disagree on what to do with it and it could even become a source of tension.  So I'd try to forget the "leave it to the kids" part of the equation, and the "keep it in the family" sentiment.  It will most likely be sold when you die, if not before.  If you accept that, then you can make a better decision.  It's a business decision, make it accordingly.  I'm all for sentiment, but it's not like you are going to live in this place or use and appreciate it as part of family history.  It's going to sit across the city (or state) and generate rent checks for you.  That's it.  Evaluate it accordingly. 

[FINate]

You aren't buying it for half off.  You could either walk away with $500k in cash that you could invest elsewhere, or you can walk away with $0, plus owing someone $500k.  (You are either positive 500k, or negative $500k.)  So the house is costing you the full $1m as your net worth will be $1m less if you don't keep/buy the house.  Don't fool yourself that it isn't. 

Also, you mention leaving this to your kids.  There's every chance they won't want it, and also a good chance that they will disagree on what to do with it and it could even become a source of tension.  So I'd try to forget the "leave it to the kids" part of the equation, and the "keep it in the family" sentiment.  It will most likely be sold when you die, if not before.  If you accept that, then you can make a better decision.  It's a business decision, make it accordingly.  I'm all for sentiment, but it's not like you are going to live in this place or use and appreciate it as part of family history.  It's going to sit across the city (or state) and generate rent checks for you.  That's it.  Evaluate it accordingly.

Yes, this^

Think of it this way: Imagine your parents sell the duplex before passing, so you inherit $500k in cash. In this situation would you use the $500k + financing (or wherever you get the other half) to purchase this duplex as a rental? If you would then it's probably a fine to buy out your sister and keep it as a rental. If not, you're better off selling.

[GilesMM]

Unless you are coincidentally actively looking to own and manage a rental just like your parents' place and in the same location when it falls into your lap, I would not consider owning and renting out theirs.  Sell it and move on. Be smart, like your sister!

[rocketpj]

When family are involved I'd recommend avoiding purchasing it yourself.  When you buy real estate you want to find the best deal you can.  When you sell real estate you want to get the most you can.  If you are on the opposite side of a deal like that with a family member it could go wrong quite easily.  If anything goes wrong - possibly not even with the transaction but somewhere else in the relationship space with your other family members - then the deal could become a hot button issue and affect your family. 

A few years ago I refused to sell our old apartment to a friend for just that reason.  He wanted to save the realtors costs, which is fine, but I wanted to squeeze every dime out of the sale while he wanted a deal.  Better to just stay friends and make different deals.

All that said, don't count chickens.  Your folks might decide to do something else entirely.  You might be in a different situation when the house becomes available.  No point borrowing trouble from the future.

I have a couple of friends that are into their 90s and they have very explicitly written their wills to liquidate everything they own down to the dishes and divide the money between their heirs to the penny.  No fights, no resentment over who gets the house or boat or whatever - just a cheque and fond memories.