Should I sell or rent this inherited property

Question

Looking for some advice after doing some homework on my end. My mom recently passed away and I've inherited her townhome in Central New Jersey. She bought the unit at the height of the market in 2006 for $245k. She owes $138k on the mortgage. I invested $20k into the unit to get it ready to sell but now I'm considering having this property be a rental. Fresh paint, new appliances, new flooring. The hot water heater and HVAC exterior unit will likely have to be replaced in the next 5 years. If I sold the unit today I could get around $266k. Mortgage payment is $1300(includes taxes and insurance), and with HOA costs has me around $1550 in monthly expenses. At most I could charge around $1900 for rent every month. I want to build a rental portfolio but I'm not sure if this property is worth keeping to start that Journey. I'm also considering selling and reinvesting the gains from the sell. Many of the units in this neighborhood are being bought up by rental companies as well.

Should I Rent or sell this property?

Dave G. · Answer

@Lin Perez I would say based on the numbers you've provided ($350 best case cashflow with no maintenance considered), you will have negative cash flow. I think it will be a loser as a rental and I would sell it.

But let's just say you actually get a couple hundred in positive cash flow (unicorns and rainbows I think). That would be a $2400 annualized return on $100k in equity. Not an impressive return IMO.

Lastly, a good exercise to me with something like this, is ask yourself if would you buy this property as an outright investment if you found it for sale in the market versus had inheriting it. Usually the answer is a resounding no. This same exercise often applies to someone relocating to another state and they are considering keeping their primary residence instead of selling it.

My recommendation is to sell and redeploy the $$ to something where the numbers work.

Good luck to you.Dave

Isaac Lewis · Answer

Hey Lin! There are so many ways you could go about this. The fact that you are considering different avenues is great. I am not quite sure how the tax laws would be factored into this so that is something to consider. If I were in your shoes I would try to do a 1031 exchange so you could avoid taxes as much as possible and put that money into a property or multiple units that could be more profitable and make you more money. Will taxes, mortgage, and HOA it seems like you might be cutting it pretty close. I am not sure what you portfolio looks like but if you are just starting out you might consider renting it out for a little bit so you are able to gain experience and practice while it builds equity and then either cash out refinance to quire more or sell and scale. Just something to consider, hope that was helpful and best of luck!

Kevin P. · Answer

My mom passed away at the end of 2013 and left me with our family home. I also spent about the same to fix it up and then rented it out. I did a cash out refinance and use that as seed money to buy my next rental house. Now I have six rentals and this process has been very good to me. Flipping houses is so temporary and it leads to a feast or famine condition. Well you know what I would do. Good luck with whatever you decide.

Kevin O'Brien · Answer

SELL IT! $1900-$1,550 = $350 a month net BEFORE maintenance. Thats $4,200 a year. But when your furnace goes out you won't make money that year. So budget at least $200 a month for maintenance. That leaves $150 a month leftover assuming you are self managing. $150 isn't enough for gas to fill my truck up.

You will have roughly $120,000 in equity in a turn key ready to sell property. Best case scenario you make like $150 a month after putting money aside for that furnace and hotter heater and rent it to someone for 10+ years who will turn it back over to you in need of ANOTHER remodel. ALL for a 1.5% per year return. YOURE LOOSING MORE TO INFLATION! Please just so i can sleep tonight Lin promise me you'll sell that terrible investment and put the funds into Vanguard total market index fund. 4X return 0 work.

Bruce D. Kowal · Answer

The alternative case, if you just love real estate, is to look at the returns from an REIT ETF.  Such as Vanguard.  If you can get a steady > 3% current dividend plus appreciation, with no management or hassle, then that should be the hurdle for all you real estate decisions.

Here is the page for the Vanguard ETF.  "VNQ":  Vanguard Real Estate ETF

For some folks, the rental real estate experience is similar to that of a Boat Owner:  The happiest moments for a Boat Owner occur when he buys the Boat, AND when he sells the boat.

Drew Sygit · Answer

Before you sell, start looking around and running numbers on potential purchases.

Just don't make the rookie mistake of comparing different classes of properties without adjusting for the extra risk. Example: Class C properties have lower tenant performance than Class B, so you should use a higher vacancy/nonperformance percentage for them.

Once you have a better idea of your options, you can make a more educated decision.

Of course you can always just follow the advice of the "strangers" on this site.

Mike D'Arrigo · Answer

@Lin Perez just based on your numbers, I would sell it. You didn't factor vacancy or maintenance in to your expenses so you have to add in another 10% at least. That doesn't include property management if you are going to use a PM. If you do sell.

Jonathan Soto · Answer

sorry for your loss. . if you cant do short term rental. sell it and try to get something more proftibale

Cody Hunter · Answer

@Lin Perez I am gonna jump on the sell it band wagon. The income is negligible to help you grow. Rather, do your research when redeploying the money for growth. You can make it happen!

Should I sell or rent this inherited property

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