Paid Off Rental Properties: Next Options?

Question

Hello,

This is my first post on BP and excited to become a regular users! I have been reading a lot of books on Real Estate investing and methodologies, listening to the podcast's on BP and going to meet up groups to learn more.

My question is in regards to rental property that my father owns and what the best options for him may be.

Background: My father owns 4 different properties in the south suburbs in Chicago, all 4 properties are paid off. 3 are currently single family rental properties and 1 is a residence for his family. Of the 3 rental properties, 2 are occupied (renters somewhat paying rent) and 1 is for sale (been for sale for 12+ months). The house's current market value have been appraised for roughly $30k - $60k each. (All different sizes, bedrooms, conditions.)

Ideas:

My father is 74 years of age and still working but plans to retire within the next year. The family plans to move to another suburb and retire all together. He is having issues selling the houses due to several reasons. People in the area can't qualify for a loan, the neighborhood itself isn't desirable and he has sentimental value tied to the houses.

I am not in charge of these houses but I want to evaluate the opportunity of these properties if done properly. Because these are paid off, there is some potential but I am not sure the area of Chicago offers much. Below are two of my ideas:

Property Manager: determine a property management company for the South Suburbs to help manage/run the property. Cash flow the rental income since these are paid off without any of the headaches dealing with the local tenants. I have a friend who does contracting work who I could ask to do the contracting work if needed.

Donation: since my father is still working, he can use the donation of the houses as a tax write off to his income. This would be the easiest of the solutions but I do not know much about this from my studies/reading.

Feedback/Ideas: This is my first time posting on BP but wanted to throw this idea out to individuals on the forum to get some ideas. Feel free to ask away for questions so that I can provide additional information. Thanks in advance for any help.

Aaron Vaughn · Answer

hi Donald! Welcome to BP! My question has more to do with what you would like to accomplish in real estate on your own. You have the background  knowledge and you seem to know a good part of the business. I have tried to do business in the past with family and as the other contributors have  mentioned , as well as yourself that can be tough because of things like old-school drinking and holding on two properties for sentimental value. My advice is to invest in yourself as you cannot convince others to do what you yourself want to do .

Donald Aleshire · Answer

Thanks everyone for the amount of information that each of you provided. The feedback really helps affirm a lot of what I was thinking on my end.

The lease option may be an option but it will be a tough sell to my father as I know he want to wipe his hands clean. The taxes piece might be something I can dive deeper in the forums but it sounds like it may not be worth it.

The property management route seems like the most logical but I do have to crunch the numbers to make sure it will work. (capital expenditures, property taxes, etc.) I doubt believe he will want to put any money into the houses just because of the local economy/housing prices.

Can't thank everyone enough for the open opinions and thoughts. This has helped a lot and gives me a good direction on where to head next. Thanks everyone!

Alex Bok · Answer

Finding a good property manager is a good idea. Also would you want to try to put some money back into the properties itself to try to get more stable tenants and increase the value of the properties?

Deanna McCormick · Answer

I tend to agree with @Aaron Vaughn, the rentals were your fathers dream and could end up being your nightmare,, I was in similar boat,, but before my dad passed he made up a trust and all his rental property's were part of that. He died unexpectedly, in fact I got the bank approval for funding on a property he had secretly been working on 2 days after he died.. we didn't buy that property..

But you should encourage him while he's mind and body able to consolidate and release the less likely property as soon as he can,, he's paying property taxes, insurance, utilities and some upkeep to maintain a empty house,, that is lost money.. get aggressive and maybe do a contract for deed or lease option to buy.. or if it's smart to keep it get it rented out.

Get a current valuation on his holdings, have your dad consider making up a trust, so they don't have to go thru probate if he were to die, and help him get a game plan for the future.

A property manager I'd tend to agree,,especially if no one is close to manage,, take a good look at how much it's actually costing to maintain the rentals each year.. what's the current profit margin that he's paying taxes on now after expenses.. with a property manager fees is he just going to come out even,, I'm sure if he's had them for awhile he's probably not got much depreciation he can take for them also off for taxes. and the older they get the more expenses you may have with roofs, furnaces, and ect.

You've got more to help him consider than he's probably ready to clearly jump on making a decision, so good your helping.

Tax wise I was advised to sell 2 rentals of my parents within the year of his death, which I did..sold one last fall , and still have managed the last property for the trust but am in the works for finally closing the deal on that soon. With out the trust it would have been nightmare. I knew ahead of time what I could expect and needed to plan for.

Good Luck

Aaron Vaughn · Answer

Sorry I meant old-school thinking not drinking LOL

Allen Chaney · Answer

Welcome to the community. Unless he's making over $250k/year at his job, donation may yield almost no affect(a $60k house donated might save him a max of $18k, and likely much less. Consult tax brackets for a better idea). The property manager route is a viable solution. Look for one that deals with turnkey property in my opinion, they're more likely to be able to provide the stress free setup that you seem to be searching for. Another option is to sell them at a discount to an investor. I'm currently trying to do this with a house that isn't in a great neighborhood, and needs a little work. I figured I'd sell it cheap to an investor that's looking to get started. A third option I'd suggest is consider seller financing. Collect a down payment of $5000 or so and sell it on payments. usually with 2-3 years of seasoning, the buyers would be able to refinance out and pay him off.

Paid Off Rental Properties: Next Options?

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