Feedback/advice on inheriting real estate investments

[Jeremy Lee]

Hey guys,

My dad just threw an unexpected curveball at my two older brothers and I, saying he wants to reduce his and my mom's tax liability/burden by unloading one of his properties (a 1 bed condo/apartment unit on the lower level... although every unit I've looked up on Zillow/Trulia/Redfin/etc seems to indicate that these are all 2 bed units... not sure how they're coming up with that unless they're considering the living/dining area to be the "second bedroom") which is local in the town my parents and one of my brothers lives in up in the Bay Area. It's a 15min drive away so super close to both my parents and one brother. The unit is fully paid off and has appreciated quite a bit I'm sure. I don't know what they paid for it but it's probably worth at least $450k now. They've probably flat-out owned it since at least the 90s, if I had to guess. By "unloading" he means transferring (and presumably gifting) title to my brothers and I so all our names are on the deed. From there, we could decide what we want to do and either continue renting or sell.

Currently, he told us he's renting it out for only $1200 a month. HOA dues are $375 and property tax is encroaching $1700 a year. So the profit margin is low already from what I've gleaned. Fair market rents in that area are maybe $2k based on just looking around online. And the city they're in is rent-controlled to where you can't raise rents for over 5% without getting mandatory approval.

So far one brother has expressed interest in just taking over the property and continuing renting it out. I mentioned raising rent but he was reverting back to "the current tenant is good and pays rent. Don't screw it up" - I then reasoned with him on the basis that if every other neighbor is paying $2k~ in rent and this tenant is the only one paying $1200, it's likely there's quite a lot of headroom for rent increases before they would ever consider moving out. And if we abide by the 5% rent increase rule, we should slowly be able to increase rents in accordance with the city while not pissing the tenant off so much that they'd want to move out. The other option of course is to evict the tenant and bring in a new one and renting according to current fair market rent. My parents, I think, just wanted a mostly trouble/hassle free rental and aren't landlord types of people (they often accept CASH as a form of payment...ugh). I don't know if they've ever raised rent on any of their tenants and like to think they're doing people favors by giving them a huge discount... I guess it's worked out OK for them? From their perspective, it seems they don't care about this form of income based on how much money they've accumulated and saved over the years. Ironically, it seems real estate is a 'minor' asset for them based on all the discussions I've had with them.

My dad was saying we should just sell the place once it's under our names and reinvest the money in some other property... not quite sure how that would work to our advantage in the Bay Area, considering how crazy housing prices are. Plus we'd get hit with additional taxes wouldn't we? My brothers both aren't investor types (AFAIK) so reinvesting the money out of state likely wouldn't be a possibility for them. If anything, they would likely want to cash out their shares and take the money.

Given this situation, I was looking for feedback on what you guys would do or if there's something that's a flat-out given/no-brainer (like "Yes, keep it, raise rent and keep renting it...) based on what I've shared so far. Or if any of you have been in this type of situation, what you ended up doing and if you'd do anything differently.