When you inherit a house, you will need to make some decisions about what to do with it. If you’re not planning to move into it yourself, your main options are to sell it or to rent it out. What makes the most sense for you?
As Kelowna property managers with decades of real estate experience, we help owners make this decision all the time. It really comes down to your own financial situation and your own plans for property ownership and future investments.
Let’s take a look at some of the most important things to consider as an inherited property owner.
Benefits of Selling Your Inherited Property
If you have no interest or emotional attachment with the home, the easiest course of action might be to sell.
Quick Cash
If the market is in good shape, you’re likely to earn at least the appraised value of the property.
If there’s no mortgage on the home and you aren’t dealing with a shared ownership situation, selling can make you some quick money.
With demand high and inventory low, you’re likely to have competing offers and a quick close.
No Ongoing Expenses
Selling can also work out best for you if you inherited the home jointly with other family members or individuals. Everyone would get an equal share of the property sale proceeds, and you won’t be on the hook for any ongoing property taxes and insurance.
You might stand to earn more money in the long term by renting. You also have to consider the condition of the property. If it’s not in great shape, you’ll have to sell it at a lower price as-is or invest some money in making repairs and upgrades.
Cons of Selling Your Inherited Property
Costs of Selling
If you do sell, make sure you factor in the many costs of selling your home, including commissions to a real estate agent if you go that route.
The costs of selling can add up to around 10% of the total sale price. If your home is asking $900K, that means you’d pay around $100k in fees and expensesd.
Capital Gains Tax Obligation
in addition to any inheritance tax on the estate, you’ll also be liable to pay the Capital Gains Tax on 50% of the amount you receive. For example, if you earn $500k from the sale of your home, you have to pay income tax on $250k of income in that year, which varies based on your personal tax bracket.
Loss of Steady Income
While selling offers you a sudden financial windfall, you’ll miss out the steady source of income you would otherwise get as a rental property owner.
Benefits of Renting Out an Inherited Property
You can always hold onto the home you’ve inherited and rent it out to tenants.
This option comes with a number of benefits:
Cash Rental Income
You’ll have a consistent source of rental income and the potential to increase that cash flow.
If you price it right, any remaining mortgage liability will get paid off by your tenants via their monthly payments.
Keep in mind that you’ll still have to pay income tax on the monthly rents.
Tax Deductions
Landlords can take advantage of several tax benefits to reduce their taxable rental income. Some of the most common tax deductions are mortgage interest, property taxes, operating expenses, depreciation, legal & professional services, and advertising costs.
Keep in mind that tax laws can change, and it’s essential to consult with a tax professional for the most up-to-date and personalized advice.
Capital Appreciation
Over time, equity in the home will likely increase and so will the value.
Your sale in five or 10 or 20 years might yield more money than a sale today. It might also beat the ROI of investing at the risk-free rate.
Cons of Renting Out an Inherited Home
Being a landlord isn’t always easy, especially if you’ve never done it before.
Getting Ready to Rent
If you decide to rent out the home, you’ll need to make sure it’s ready for a tenant. This process could require some cosmetic upgrades, a few improvements, and a complete cleaning.
Then, you’ll have to decide how much to rent it for and what kind of lease to offer. You could do a long-term rental with a lease of a year or more, or you can rent it out temporarily, on sites like Airbnb or as a vacation property.
Vetting & Managing Tenants
The downside to renting out a home is that you need to find great and reliable tenants. Tenant screening is an important part of renting that requires time and thorough effort.
The last thing you want is to end up with lousy tenants who don’t pay the rent on time, damage your property, or bring in unauthorized guests.
You also need to know the laws associated with renting a property, and be sure to abide by them when you create the lease agreement, communicate with tenants, and manage the lease.
Ongoing Repairs & Maintenance
As a rental owner, you’ll be responsible for completing repairs and maintenance tasks to keep the unit in a state of decoration and repair that complies with health, safety, and housing standards. In BC, any repairs due to reasonable wear and tear are the responsibility of the property owner – not the tenant.
2 Rules of Thumb to Help You Decide
The 1 Percent Rule | Rental Income vs Selling Price
The 1 Percent Rule is a rought way to measure whether on not renting a property will turn into a profitable investment. The 1 Percent Rule states that if the montly rental income is 1% or more of the purchase price of the home, then it’s worth keeping the property as a rental. If it’s less than 1% of the potential sale price, you’re better off selling the home.
Note that this is not financial advice. You might consider speaking with a financial advisor before making this decision.
The 50 Percent Rule | Expenses vs Rental Income
The 50% rule in property management suggests that landlords should allocate approximately 50% of their $monthly rental income towards covering expenses and repair issues, such as fixing a roof, addressing plumbing problems, or handling electrical repairs.
If your property commands a $3,000 monthly rental income, you should set aside $1,500 per month to cover anticipated maintenance costs.
For newer homes, or homes in excellent condition, you might only need to set aside 25% of the rental income for expenses.
Work with a Professional Kelowna Property Manager
If you decide to rent out the property you’ve inherited, it’s essential that you work with a Kelowna property management company. A property manager will remove a lot of risk and liability from your plate. A good management company will know the market and understand the tenant pool. You’ll get a good and competitive price for your property, you’ll have excellent tenants in place with a record of paying rent on time and taking care of properties, and you’ll have a legally binding lease in place that your manager will enforce.
Still not sure which option works best for you? Contact us at Vantage West Property Management. We’ll take a look at your unique situation as well as the property you’ve inherited, and we’ll give you our best advice.