What if you’ve just inherited a rental house and have no experience as a landlord? Don’t worry. Inheriting a house with a tenant may seem daunting at first, but there are some simple steps you can take to handle this situation smoothly. I have over 15 years of experience owning and managing rental properties, and I’ve helped many people in this situation. I’ll present a simple approach to help you decide what to do with your inherited house.
If you inherit a rental house with tenants, you should first understand the property and lease thoroughly. You must avoid making quick and uninformed decisions. If you decide to sell, you want to preserve equity and sell for the right price. On the other hand, you may decide that you now have an opportunity to own an income-producing property for the long term.
Understand the Situation with your Inherited Rental House
Probate
Probate is the legal process used to settle the estate of a person that has passed away. If the person had a will, the process would be more straightforward, but either way, the probate process is necessary. This is when family members may contest the inheritance, and probate will end with a clear property owner. You should seek legal advice to better understand the legal requirements governing probate.
Access the Situation
Once the house has cleared probate and it’s clear that you now have the legal right to the property, the first thing you should do is get a complete understanding of the situation. You mustn’t skip this step. Whether you decide to sell the house or get into the rental business, these answers are essential. Below is a list of the main things you will need to understand.
- Are property taxes current?
- Are there mortgage payments that you are responsible for?
- Have any repair expenses not been paid? Someone can put a mechanics lien on the property for work performed and not paid for.
- Does the tenant have a valid lease? A lease is essential with rental properties. The lease is the document that gives you standing to initiate court actions, such as an eviction process.
- Is the tenant current with the rent? It’s important to know if the tenant owes past-due rent or if they have prepaid any rent. I was in a situation where the tenant of an inherited house claimed to have paid rent one year in advance, and no one could refute this claim.
- Is there a security deposit? As the new owner, you may be on the hook for the return of any security deposit.
- Are there other assets that come with the house? In some cases, the previous owner may have a bank account that holds the working funds and collected rent for this property. In some jurisdictions, the security deposit must be kept in a separate bank account. You need to determine if you are now the owner of other assets related to the inherited property.
Estoppel Certificate
An estoppel certificate is a legal document that confirms the terms of a lease agreement between a landlord and a tenant. This document is essential when the ownership of the property changes with current tenants in place. In place of an estoppel agreement, the new landlord can establish a new rental agreement with the tenant in the inherited home. The terms of the lease would then override the original lease.
Property Status
It is essential to get a thorough understanding of the property status. Is the house in good condition? Are there any past legal obligations to settle?
Discovering relevant information is not always straightforward. Hiring a real estate attorney to search for liens and other legal issues may be a good idea. The inherited tenant is a good source of information, as they are probably the closest to the property, but tenant statements should be taken with a grain of salt.
Assess the Market for Selling the Rental House
You should not bypass this step even if you plan to keep the rental house. During this research phase, you will likely learn valuable information about the home that may help you. A local real estate agents will probably help you with this research if you agree to give them a potential listing. The agent should be able to estimate a selling price and advise you on the level of renovation required to be consistent with the neighborhood.
When inheriting a house with a tenant or without, it’s essential to determine if the neighborhood is better suited for a rental or an owner-occupied property. If you decide to sell the house, this knowledge will help you decide if the likely buyer will be a landlord or a homeowner. When selling to a homeowner, you must have a recently renovated and vacant property. Conversely, selling to a real estate investor requires much less presale preparation, and the buyer may prefer to have a tenant in place.
Decide if You Want to Sell your Inherited Rental House
Although selling the house requires more upfront work, you are comforted knowing that the hassle will soon end. When the sale closes, the aggravation is gone forever, and you may be left with a lump sum. In general, for federal income tax purposes, an inherited house comes with a stepped-up basis, which means profit from a sale will be the difference between the selling price and the house’s value when it was inherited. For this reason, there should be no capital gains taxes owed, but check with an accountant to understand the tax ramifications in your specific situation.
Managing a rental property is not passive; it’s a job with a level of aggravation. You could turn this over to a property management company, but you still must pay for repairs and give a percentage of the rent (not of the profit) to the property manager. With that in mind, you should know that a successfully managed rental property will provide rental income indefinitely and may be just the beginning of an extensive real estate portfolio.
After thoroughly understanding the property you inherited and becoming familiar with the local real estate market, it’s time to decide if you want to keep the house. It essentially comes down to whether you prefer easy and a lump sum or if you will put up with some hassle for a long-term monthly income. That decision is yours to make.
Selling Your Inherited Rental House
To sell the house, you should make the renovations discovered in the assessment stage. When the home is ready, list the property with a real estate agent who will handle the rest of the process. Selling a house is tedious; a professional knows how to vet a potential buyer and move the process along. This approach may come with minor aggravation but will allow you to realize the equity and get the highest price.
If Inheriting a house with a tenant is too stressful, and you intend on dumping the property quickly, you can contact a ‘We Buy Houses’ type company. These places are easy to find with a simple Google Search. This transaction will be quick and hassle-free, but you will give up significant equity. If you want maximum financial gain, you should take a different route. However, this may be the best option if you are adamant that you want a hassle-free and quick process.
Keeping Your Inherited Rental House
When inheriting a house with a tenant and deciding to keep it as a rental property, I recommend you manage it yourself. A property management company will ease some of the hassles but will add to the cost. You should learn how to manage the property and decide if you want to delegate this to a management company.
By understanding the business, you will know what to watch out for and what to stay on top of. If you immediately turn it over to a management company, you will not have the experience to determine if the company is doing a fair job for its pay. If you are not convinced to manage the property yourself, read my article about the pitfalls of using a property management company.
A lease is essential when you own rental properties, and you must ensure your tenant is on a valid lease. If there is an existing lease, which you inherited along with the tenant, you should vet the terms of their lease to ensure it’s adequate. A real estate attorney can help you with this, and that is money well spent while you are learning the business.
If there is no lease, you must get the existing tenant on a lease as fast as possible. Usually, you can offer a reduced month or some other benefit in exchange for the tenant signing a new lease. When the time comes to get a new tenant, ensure you have the proper lease to protect your investment property.
Conclusion
When Inheriting a house with a tenant, you must decide if you are keeping the house. Before you make that decision, know exactly where you stand with the new property and the situation with the tenant. You must also understand the local real estate market to know what to expect if you sell the house. Once you know these things, you can decide whether to sell the house or become a landlord. If you want to keep the rental property, please check in with me frequently for real estate investing advice.
