Inheriting a San Jose, CA Home - Rent or Sell?

[Nels Haugen]

My grandfather passed in the last year, and he left two properties to my mother to inherit.  My mother is looking for me to manage the 'family decisions' when it comes to these properties. I've been learning a lot about RE lately but am still new to it all so looking for some guidance - and understand that nothing here is legal advice.  My mother and I live in the midwest.

The first property is a home in San Jose, CA. The home is a 3BR 1BA with garage in a great neighborhood. The house is definitely livable, but is pretty much empty and needs a good amount of updating as it's pretty much in the same condition that it was built in in the '60s.  Another small bathroom could be added.  The lot is a pretty good size. The value of the home is estimated at roughly $1M-$1.15M in its current state.  The home is paid off and the taxes on it are only $2700 per year, which I'm sure is crazy low for being in this part of California -- I don't know if the tax situation will change when ownership transfers to my mother -- anyone know?

Zillow's estimate of monthly rent for this home is $3424. What would be the best approach to analyzing this situation to land on a decision to sell this home, or put some equity into it and make it a decent rental, or do some fix and flip work on it?

I want to make the best decision and set up my mom with a secure future for her retirement as she is nearing her 60's, and feel like this is a real opportunity for her to have solid cashflow for the rest of her life. If she were to sell the home, she would be fine, but then it becomes a question of what to do with the cash in this type of market.

Appreciate any insight!!!

[Nathan Gesner]

Quote from @Nels Haugen:

My grandfather passed in the last year, and he left two properties to my mother to inherit.  My mother is looking for me to manage the 'family decisions' when it comes to these properties. I've been learning a lot about RE lately but am still new to it all so looking for some guidance - and understand that nothing here is legal advice.  My mother and I live in the midwest.

The first property is a home in San Jose, CA. The home is a 3BR 1BA with garage in a great neighborhood. The house is definitely livable, but is pretty much empty and needs a good amount of updating as it's pretty much in the same condition that it was built in in the '60s.  Another small bathroom could be added.  The lot is a pretty good size. The value of the home is estimated at roughly $1M-$1.15M in its current state.  The home is paid off and the taxes on it are only $2700 per year, which I'm sure is crazy low for being in this part of California -- I don't know if the tax situation will change when ownership transfers to my mother -- anyone know?

Zillow's estimate of monthly rent for this home is $3424. What would be the best approach to analyzing this situation to land on a decision to sell this home, or put some equity into it and make it a decent rental, or do some fix and flip work on it?

I want to make the best decision and set up my mom with a secure future for her retirement as she is nearing her 60's, and feel like this is a real opportunity for her to have solid cashflow for the rest of her life. If she were to sell the home, she would be fine, but then it becomes a question of what to do with the cash in this type of market.

Taxes are likely to increase when ownership changes. It wouldn't hurt to do some research to see what others are paying in the area and use the higher price in your calculations.

You could talk to a lender about borrowing some of the equity to renovate the home before renting, then it would probably bring in a higher price. Even after that payment, taxes, and insurance, you should have $1,500 - $2,000 a month income forever.

It sounds like you lack experience and you're in one of the most regulated, litigious places in the world. I highly recommend you do the work to find a property manager that can handle this for you. Spending 10% can save you tens of thousands in lost revenue by making one mistake.

Remember: cheaper doesn't mean you'll make more money.

Start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. You can also search Google and read reviews. Regardless of how you find them, try to interview at least three managers.

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 6% management fee but the extra fees can add up to be more than the other company that charges 10% with no additional fees. Fees should be clearly stated in writing, easy to understand, and justifiable. Common fees will include a set-up fee, leasing fee for each turnover or a lease renewal fee, marking up maintenance, retaining late fees, and more. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate, particularly if you have a lot of rentals.

4. Review their lease agreement and addenda. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that policies are enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact that a tenant is complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

7. Look at their marketing strategy. Are they doing everything they can to expose properties to the widest possible market? Are their listings detailed with good quality photos? Can they prove how long it takes to rent a vacant property?

This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!