Inheriting property – while associated with the unpleasant experience of losing a loved one – can be the beginning of your side hustle in real estate. Suddenly finding yourself as a property owner is a windfall – you can begin making money in real estate without an upfront investment.
But first, you have to make the decision on how you wish to make money in real estate with the inherited property. You have two main options here: sell or rent out. Both options can be profitable. There is no right answer to what to do after inheriting property – it depends on the numbers. We will explain how to analyze the property and what to look for to make a decision.
Selling or Renting Out an Inherited Property: Pros and Cons
First, let’s look at the pros and cons of the two options: sell or keep rental property.
Pros and cons of renting out a house
Here is what to expect if you decide that becoming a landlord after inheriting property is right for you:
- You earn a rental income on a recurring basis – whether you rent out the property as a traditional long-term rental property or an Airbnb.
- There is no need to rush to sell because you will be making money rather than spending money on holding costs. This is especially important if the inherited property is in a buyer’s market where you may not get the best price.
- You can rent the property out on Airbnb and use it as a second home when needed.
- You will benefit from real estate appreciation.
- Owning a rental property will claim some of your free time.
- If the investment property is far from where you live, you will need to learn to become a remote landlord or pay for professional property management.
- The house might be in need of a renovation before it can be rented out to tenants, which will cost you some money.
Pros and cons of selling after inheriting property
Inheriting property may not be in your plans and you might feel you do not want the responsibility for it. Here are a few things to consider before selling.
- You can make a lot of money if you’re selling in a seller’s market.
- There is no need to take care of the investment property or spend time dealing with tenants.
- You can invest the money you get from the sale in something else.
- It could take a long time to sell depending on the real estate market, in which case, you may have some holding costs to pay.
- If you hurry to get rid of the property to avoid paying for its upkeep, you might lose out on emerging housing market trends (possible real estate appreciation, for example).
- In some places, owning a rental property is more profitable than selling one.
- If you are emotionally attached to the property, you might feel as if you were betraying the person you inherited it from.
Now, inheriting property is serious. It can be a lucrative real estate investment opportunity and you should make an informed decision backed by data. Emotions may not be the best advisor in this. That is why we recommend analyzing the potential of the property to see hard numbers before making up your mind.
Doing Rental Property Analysis
Rental property analysis means evaluating the rental’s potential for earning an income. It involves listing all expenses to be incurred (monthly and one-time) and doing the math to see if the rental price covers them. This would mean you have a positive cash flow property, which is great. If not, inheriting property and renting it out will cost you more than it is earning.
But how can you know the size of the expenses and how much to charge for rent? Going through rental listings and comparing them to the one you inherited is one way. A spreadsheet with all the property data like size, type, condition, property taxes, rental prices, etc. sounds hard to compile, though. And you might find it challenging to calculate the rate of return, cap rate, and other financial metrics by hand.
Using Mashvisor’s Rental Property Calculator
Real estate software can help you. Mashvisor is a platform where you can input the specifics of your property (learn how to do that here) and get an automated analysis in seconds. This analysis will include all the data you need to decide whether to rent out the property or sell it including:
Rental comps. The software finds similar properties by:
- number of bedrooms and bathrooms
- condition and year built
- list price, etc.
Cash flow. Mashvisor’s rental property calculator estimates expenses and a realistic rental income for the property based on historical data. Maybe you are inheriting property subject to a large property tax or rent prices in the area are low. Anyway, you will see if you can expect the property to be cash flow positive or not.
Cap rate and cash on cash return. Learn what kind of return on investment you can expect in terms of cap rate and cash on cash return.
Optimal rental strategy. The analysis Mashvisor provides also compares traditional vs Airbnb renting because the ROI metrics are often very different. In some places, one can be far more profitable than the other depending on taxes, fees, regulations, and demand. You will see all stats including the Airbnb occupancy rate for detailed understanding.
Payback period. This is how long it will take for you to make the investment money back and start earning a profit on top of it. Since inheriting a house means your investment would be only in renovation, marketing, property management, etc., this period might be quite short. This is a great reason to keep it when inheriting property.
If all those metrics look good, you are likely to earn a good income from a rental property investment strategy and the verdict would be to rent it out!
To start evaluating real estate opportunities, sign up for Mashvisor.
What to Do If the Property You Inherited Would Not Make a Good Rental
Maybe after running the rental property analysis, you will find out that the property you inherited will not be very profitable as a rental in the housing market it is located in. Maybe Airbnb regulations are too strict or the property needs a lot of renovation to be up to par with the others in the neighborhood. This means you should sell it. Here are a few alternatives to renting when inheriting property.
Go back to Mashvisor and explore the available investment properties with an asking price close to the estimated value of your inheritance. You might find that the housing market in another state has a lot more to offer. Thus, with only turning one property into another, you might get a better rental income – and even a vacation home, too.
You could also search by your desired rental income. If inheriting property does not match up with your financial goals, maybe reinvesting the money in a more lucrative type of property will do.
Invest in another type of property
You can sell and use the money to buy another investment property closer to home, but a condo, a townhouse, or even a commercial rental property.
Move in and rent your current home
Maybe you are attached to the house you inherited and do not want to sell. But if it is not going to be a good rental property based on the analysis, why not switch things up? Run the same analysis on Mashvisor on your current home and see if it is more likely to earn you a good rental income. If yes, you can rent it out and live in the inherited one. Just be sure to check your mortgage agreement (if you have one on your primary residence) to ensure this is allowed.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.