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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: baconschteam on January 11, 2021, 12:07:50 AM

Title: New to the game, inheriting a house, sell or rent?
Post by: baconschteam on January 11, 2021, 12:07:50 AM
Hi all, my fiancee and I are in the first stretch of our FI journey (about $50000 in VTSAX so far) and I am inheriting a house. I have always had a sort of obsession with the idea of investing in rental properties once I was out of debt. I am somewhat handy and it appeals to me. Now that I am debt free a property is falling in my lap. However, running the numbers, it seems like it would be a much more potent idea to just sell it and pour the cash into VTSAX. I have also been eyeing multifamily units around the Hudson Valley, but since I won't be back on the East Coast for a couple of years (currently in CA), it doesn't make sense to pull the trigger on that.

According to Zillow, the house is worth 190k. It is one of the nicer houses in a nicer neighborhood of Brownsville, TX. It needs a little work; by my (untrained) estimate it needs around $5-6k of work to be sellable/rentable. I currently have a contractor working very slowly on it for a cheap price. I am going to take Zillow with a grain of salt and say I could sell it for $165k (I have no idea how accurate Zillow is). So $165k-$5(rehab)-$5k(selling cost)-$61k(mortgage) would give us around $94k. I've worked out that if I were to rent it out, the cashflow would be around $150 per month (this includes 10% for vacancy, 10% for management, 10% for cap ex, releasing, other standard things). An average stock market return (7%) on $94k would be about $550 per month. Is this as much of a no-brainer as it seems?

I would be splitting all of this 50/50 with my sister, but I am in charge of figuring it all out. Any advice appreciated! Feel free to point out if/where I am being naive!


EDIT: We will be selling. Somebody in the neighborhood has offered to buy the house. He has not made an offer yet, but if it is close the market price (I'll check out some comps from the last few months) would it be practical to skip a realtor? It would be nice to not pay one. They lawyer who is handling my father's estate also happens to be a title lawyer, so she can handle that part of it. Sorry if I'm missing something, this will be my first time buying/selling property.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: Linea_Norway on January 11, 2021, 12:59:24 AM
As you are a handy person, it might be an advantage if you could cut out the 10% management fees in your first rental by doing the management yourself.

Owning a rental together with your sister might complicate things. Would she be your preferred business partner? If not, I would just sell the house or buy her out.

Did you include yearly maintenance in your calculations? And any property taxes?
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: baconschteam on January 11, 2021, 01:29:47 AM
Thanks for the reply, I agree, I would like to self-manage the first time around. Not possible with this property since it is in TX and I am in CA. It's possible I would buy out my sister in this situation, though she wouldn't be a bad partner, and has similar goals, I think she'd prefer the cash. I did include taxes, maintenance, insurance, mortgage and city utilities as well, in the math. I am not sure what percentage of the mortgage is principal. The payment is $415 a month and has around 4% interest. Rent would be around $1500.

But my real question is - if VTSAX returns almost 4x as much - the choice is obvious, right?
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: Paper Chaser on January 11, 2021, 05:51:57 AM
VTSAX is definitely the easy button. And it would spare any emotional attachment issues related to renting out the inherited house.

I'm not sure how it would work with joint ownership on an investment property, but what would a cash-out refi do to the rental numbers? It might allow keeping the rental (with a lower interest rate), while simultaneously giving you a bunch of cash to invest.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: PMJL34 on January 11, 2021, 10:47:19 AM
Just sell it. Take the proceeds and put it into vanguard or look for another property with your desired location.

If your sister wasn't 50% owner, I could argue for your keeping it, but with her involved, even if she's an awesome sister, it's not worth it. Plus, it's an out of state home that you are not attached to or plan on living in.

Best of luck!
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: cool7hand on January 11, 2021, 10:50:09 AM
I'm no tax wiz, but whatever you do, keep taxes in mind. There should be ways to use the estate to increase tax efficiency. I think this should get you started: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: Cb1234567 on January 21, 2021, 09:46:00 AM
Partnership with sister = no way
Long distance landlord = no way
Rent is <1% of home value = no way
Taking your numbers at face value, the cash flow will be $150/2 people = $75? For what trouble? Um, no thank you.

“Free” isn’t always free.

You’re out of debt and starting to invest. Sell the darn thing. Invest more, and later, buy a rental of your choice.
If you had the money sitting on your kitchen table in Benjamins, would you drop it on That House?

Regarding pricing, look for similar properties that sold (Zillow has this) in the last 6 months or so. Zestimate isn’t always (ever? ;-) reliable.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: Dicey on January 24, 2021, 01:21:42 PM
Sell.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: Dee18 on January 24, 2021, 05:09:09 PM
If you inherited $95000 would you use it to buy this exact house?  If the answer is no, then sell it.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: baconschteam on February 10, 2021, 09:19:32 AM
Somebody in the neighborhood has offered to buy the house. He has not made an offer yet, but if it is close the market price (I'll check out some comps from the last few months) would it be practical to skip a realtor? It would be nice to not pay one. They lawyer who is handling my father's estate also happens to be a title lawyer, so she can handle that part of it. Sorry if I'm missing something, this will be my first time buying/selling property.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: trollwithamustache on February 10, 2021, 09:27:39 AM
self manage means you would be in Brownsville TX to rotorooter the toilet when you tenants flush a diaper down it.

Sell or get ready to loose a lot of money.
Title: Re: New to the game, inheriting a house, sell or rent?
Post by: baconschteam on February 10, 2021, 10:35:16 AM
self manage means you would be in Brownsville TX to rotorooter the toilet when you tenants flush a diaper down it.

Sell or get ready to loose a lot of money.

I never said I would be self managing. Management costs are included in my cash flow calculation.

However, we've decided it makes more sense to sell, anyway. Thanks!