Inherited a Rental - Rent vs Sell Case Study

[NoCreativity]

RENT VS SELL CASE STUDY

Single Family residence

3 bedroom, 1 bath, carport, big back yard, probably a full acre lot, single outbuilding (shed), single carport. dated kitchen, fresh carpets, new generic tile in the 1 small bathroom, fresh paint, decent shape overall, new roof, 12x12 covered back porch / patio area. Stable neighborhood. nice, quiet older neighbors.  Spouse recently inherited this property already being rented with a management company. Same tenants for at least 2-3 years, on time payers, non destructive so far.... unsure of pets or smoking...

we live in the same town as this property but about 20 minutes away. stable community overall (resort / retirement community without large fluctuations in growth & loss of local housing / economy traditionally....


Market Value: 95,000-115,000 looking at comparative properties in the area

Original Purchase price: 0$

Original Mortgage Amount: $0

Interest Rate: n/a

Mortgage Term: n/a

Term remaining: n/a

Amount remaining on mortgage: n/a

Gross Rents: $700 / month, additional $30 for each day the renter is late on a payment

Principal and Interest (the P&I of your PITI - should match with the above info): n/a

Taxes and Insurance (the T&I of your PITI): approx $40 / month, unsure of personal property taxes yet?

HOA costs: none

Management Fee: $70 / month.

Sanitation Fee: (trash and sewer) $16/ month

Deferred maintenance notes:

We will take a pretty big hit on taxes this year with this home plus some other investments and a high earner tax bracket....

[bobechs]

Sell.

You are only a landlord in your dreams.  Your bad dreams.

[Hoerwolle]

I can't say much about the taxes, but let's make a simple calculation about the potential income:

SELL the house: ~$110000
this will (properly invested) yield you (using 5%)

result: ~ $5500 per year


RENT the house:
rent: 12 x $700 = $8400 per year
costs: 12 x $126 = $1512 per year

result: $6888

Difference: $1388

but: you will face repair costs and you will have months that your current renter will have moved out and your new renter will not have moved in yet (although if fluctuation is minimal, so this might be neglectable). If you can do a lot of stuff yourself, you will still have to buy parts and you should calculate your time spent doing repairs.

I'd say renting can quickly become a loss in this case, since I would estimate the $1388 will be eaten up by repairs - maybe not in the first year or the second, but in ten to fifteen years the house will need a new roof, new heating etc. But if it is already managed (is the price for this included in the 700 rent?), ask them about repairs in the past, maybe discuss about potentially upcoming major repairs!

On the other hand, the good placing close to your home makes it a good opportunity to diversify your portfolio, if you want to own property.

[zephyr911]

MMM blog entry title: "If You Wouldn't Buy It, You Should Probably Sell It".

Would you buy this home?

I wouldn't. I'm about to buy a $55K duplex that earns more in rent, and a $40K single-family that earns almost this much. But if you don't care about max returns, it's probably a nice steady earner, an inflation hedge, etc.

[NoCreativity]

"Do you mean you are going to take a tax hit on the rental income ?"

- I think we will have to pay on the rental income as well as the value of the property at the time of inheritance? There was no mortgage on the home for many years, as far as I know there are no other liens. Not really sure how this works yet.

I do not want to be a landlord, definitely more interested in making money where I don't have to be involved...

[zephyr911]

Just a note, if you hold this property as a rental the first $3K (or more) in income will be offset by depreciation, depending on claimed value of the land and improvements.

But it sounds like you just want out of it, and that's OK.

The estate should probably get the property appraised, and then you should put it up for sale.  You may be able to do that even if it has a current lease.  A good estate attorney should be able to explain all this to you.

The key point is that leases convey to the new owner in a sale, which generally means the tenant has the right to stay until the end of any fixed period specified in the lease (unless there is a termination clause that the owner can invoke). Any commitment made by the previous owner is 100% in effect until it expires, regardless of who the owner is today.

That'll probably turn off some buyers, but it's not always a show-stopper.

[Bearded Man]

MMM blog entry title: "If You Wouldn't Buy It, You Should Probably Sell It".

Would you buy this home?

I wouldn't. I'm about to buy a $55K duplex that earns more in rent, and a $40K single-family that earns almost this much. But if you don't care about max returns, it's probably a nice steady earner, an inflation hedge, etc.

Flawed logic, comparing lower tier properties to this. My 600k house probably rents for less profit than your 40k house, bu there is a reason my house is 600k and that one is 40k. Mine is appreciating, yours is not really...it's actually likely losing value.

[zephyr911]

Flawed logic, comparing lower tier properties to this. My 600k house probably rents for less profit than your 40k house, bu there is a reason my house is 600k and that one is 40k. Mine is appreciating, yours is not really...it's actually likely losing value.

But more to the point, would you buy this property?