Turning an Inherited property into a rental
In one our previous posts we mentioned that keeping an inherited property for a rental can be a good investment. In fact over the long term one of the most profitable uses of an inherited property is turning it into a rental.
Rental property is an excellent vehicle for building long term wealth. One obvious advantage is the monthly income it can deliver, but it also provides significant tax advantages through the ability to deduct your expenses from your income and through depreciation. We recommend that you talk to your CPA about the tax advantages you could potentially achieve through rental property.
So where do you begin on the journey to becoming a successful landlord? We’d like to discuss a few of the steps involved and offer a few ideas that can give you a head start.
Get it into shape
In most cases an inherited property will require a little bit of work on the front end before it’s ready to advertise for rent. Oftentimes this is just simple cleaning and basic updates like new carpets and fresh paint. In some instances the property may require more extensive renovation like replacing the roof, remodeling the kitchen or bathrooms, or replacing the HVAC systems. It’s worth bringing the property up to a fairly modern condition in order to maximize the rent you are able to command. “Modern condition” will vary according to your neighborhood. In some neighborhoods it may mean granite countertops while in others it means Formica. Depending on the level of your handyman skills you may want to do the work yourself or hire a contractor. Once the property is in good shape you can begin searching for a tenant.
Get the word out
Potential tenants are looking for your property and you’ve got to get the word out that the property is available. A sign in the yard is a very common and effective advertising tool. A simple sign with the words “FOR RENT” and your phone number is really all that is required. Then there’s your local newspaper; a classified ad is still a great tool for connecting with prospective tenants. You may consider advertising on the internet as well. These days many people search websites like rental.com and craigslist for available properties. If advertising is not your thing, you may be better off listing with an agent. Real estate agents not only sell houses but they rent them too. They come into contact with potential home buyers every day, and many of those potential home buyers are also potential tenants.
Do your homework
Be sure to thoroughly screen all applicants – this is a key step to successful landlording. Many a bad tenant has turned what should have been a cash-flowing property into a bottomless money pit. Sometimes it’s better to have no tenant than a bad tenant. Do some investigative work. Run a background check. Check their credit score. Talk to their previous landlords and see if the tenant paid on time or if they have a history of paying late. (Tip: don’t always go off of what their current landlord tells you – he may be looking to rid himself of a problem tenant! Try to talk to the last landlord before their current landlord. He may be willing to give you a more honest picture of the tenant’s history.) It all boils down to this: if you don’t want tenants that pay late, trash your property and need to be evicted, then don’t rent to them in the first place. Establish a thorough screening process and rent to the right person from the get-go.
Cover your bases
The conditions of your rental (term, rate, etc.) will all be spelled out in your rental agreement. We recommend that you either bring your rental agreement to a lawyer for review or simply have a lawyer draw up the agreement for you in the first place. This way you will be certain that your contract fully meets your needs, protects you from liability and is legally enforceable under your local laws and regulations. It’s clichéd but true: the best defense is a good offense. Starting out with a strong rental agreement will save you headache down the road.
How long and how much?
You have several options when it comes to the rental term. You may consider initially leasing the property on a month-to-month basis just to establish a track record of on-time payment and good behavior. If the tenant is unable to deliver the rent or trashes the property you can simply decline to renew the agreement for the next month and start looking for a better tenant. Once a good track record is established you can offer the tenant a longer term such as a six-month or one-year lease.
The rent rate is usually determined by the local rental market. The rate you charge will need to be comparable to the going rate for properties of similar size and condition and with similar amenities. If you try to rent for more than what the local market will bear you may be left with an empty property – and empty property means zero income. Try calling other properties advertised for rent in your area and see what other landlords are charging. Another option is to talk to a real estate agent; they can usually tell you the going rate for rentals.
Keep an eye on your investment
Once you’ve signed an agreement and moved a tenant into the property you’ll need to decide how to handle the daily property management. Some people like to do it themselves while others prefer to hire the management out to a professional firm. Doing it yourself can save some monthly profit, but if you’re not a handyman then using a management firm is just another expense to deduct from the rent.
We hope that these tips have been helpful and have provided you with some food for thought. We know that you have needs and our goal is to provide you with solutions to those needs. We put forth our best effort to be a useful option and present you with helpful solutions to your needs. If you’ve considered your options and you think selling makes sense for you, we are here to help.
Our motto is simple: we believe that if we can’t provide a solution that works for you, then we can’t buy your house. It’s as simple as that.