What To Do When You Inherit An Investment Property

What should you do if you inherit an investment property? There are some basics you’ll want to get right…

Back in December 2008 my grandfather passed away and my family and I were left with trying to figure out what to do with his house.

Technically, it was my parents’ property. They purchased it when I was a baby in an effort to move my grandparents closer. However, as far as we were concerned, it was his house that he lived in for 20 years and we had no idea what we were going to do with it.

Fast forward a few years and we’re now starting to get the hang of this real estate investing thing, but it hasn’t been without many mistakes along the way. In fact, we’ve lost a lot of money (mostly to taxes and expenses) because we weren’t smart about our actions after my grandfather passed away.

If you’re also in a position where you’ve inherited an investment property, here are some tips to help you maneuver your next steps as you decide what to do with it.

Realize you have a potential investment property.

I think the biggest mistake my family and I made was that we didn’t see my grandfather’s house as a potential investment property. We just saw it as a house.

Had we seen it as a potential investment, we may have been more inclined to make better decisions. Instead, we (understandably) let our emotions cloud our better judgement.

Find yourself an accountant STAT.

If you find yourself with an investment property because of an inheritance, it’s important to find yourself an accountant who specializes in real estate.

“An accountant will be able to tell you the tax implications of the inheritance,” says Richelle Thomas, real estate investor and ownder of LifeLibertynProperty.com. “Depending on how the property was titled and the market value at the time the inheritance could be tax free.”

This was something we definitely didn’t do as a family. Within a month of my grandfather’s passing the tax bill increased by $4,000 because we lost the homestead tax exemption. We were now looking at a hefty tax bill.

Had we gone to an accountant, they could have helped us maneuver our new tax situation. After all, it was the end of 2008 and everything had just tanked. Surely there must have been some tax relief available for our new investment property. But since we didn’t even think of it as an investment property at the time, we also didn’t think to call an accountant.

In all fairness, it’s not easy to deal with an inherited piece of property soon after someone passes. Handling taxes is not something people want to do after they’ve lost a loved one. But as we learned the hard way, Uncle Sam moves fast so it’s up to you to figure out the tax implications.

Contact a real estate agent or a Broker’s Price Opinion.

After you’ve figured out the taxes, it’s time to decide whether or not you want to keep the investment property. For most people, it comes down to the fair market value, in which case you’ll need to call in the help of a real estate agent or a Broker’s Price Opinion.

This is similar to an appraisal, but is typically complimentary. A BPO will let you know how much the property is worth, how much it could rent for and the realtor may even suggest any repairs needed to maximize the selling value,” explains Thomas.

My family only sort of did this. We did call a real estate agent, but it was only because my parents had already decided they wanted to get rid of the property. The bad news was by this time it was early 2009 and we were in South Florida. Everything had come to a screeching halt because banks weren’t lending.

The house ended up sitting on the market for over a year until we finally decided we should probably rent it out. Had we gone with a BPO, they might have told us we were better off renting from the beginning given the economic climate.

Oh, and by the way, we were still paying an arm and a leg in property taxes during this time because we still hadn’t gone to see an accountant.

Choose your own adventure.

Whether or not you decide to keep the investment property will depend on what the real estate agent or BPO tell you. If you decide to sell, then the next obvious choice is to list it. You can probably even work with the real estate agent you contacted to help you determine the property’s market value.

However, if you decide to keep it then you have some other decisions to make. Namely, you’ll have to decide whether you’re moving in or renting it out. If you decide to rent it then keep reading.

Consider putting it under a company name.

If my own freelancing endeavors are run through an LLC in an effort to protect myself, why on earth wouldn’t I do the same with a property that’s generating income?

Putting your investment property under the name of an incorporated company can save your personal finances if a tenant falls and decides to sue you. It can also give you tax advantages you may not be able to get otherwise.

Granted, there may be downsides to generating an LLC for your property depending on your situation and where you live. For example, the popular real estate investing site, Bigger Pockets, notes how some states may require you to pay a hefty fee to keep your LLC active. Additionally, if your name is on the mortgage and then you decide to put it under an LLC, you may be required to fork over what you owe.

Of course, as with anything legal, make sure to consult a professional before making a decision. As I already mentioned, everyone’s situation is different so there is no one-size-fits-all solution. What we do know for a fact as that we should legally protect our assets, but what that actually looks like may vary.

Get yourself a property manager.

Fortunately, we did do this with the property as soon as we decided to rent it out. My mother often times lauds our property manager by saying it’s the best 10 percent she’s ever spent in her life.

A good property manager can save you headaches. They can find you tenants, collect payments on your behalf, get a lease signed and keep an eye on things so you don’t actually have to do it yourself.

It provides a nice barrier between you and your tenant that, while not always necessary, can come in handy if there’s ever an issue. For example, if something breaks the tenants are calling our property manager first.

Furthermore, when we recently had to fix up the house before renting it out again, our property manager hooked us up with contractors who could cut us a deal. I’m talking everything from a handyman to fix a door, to painters, to people who could improve the finishing on wood floors. He’s far more connected than we are and these contractors come already vetted by him.

Final Thoughts

It can be emotionally draining to inherit an investment property. Not only are you dealing with a loss, you also have to make all these decisions. Fortunately, there are steps you can take to make it less stressful.

My family and I had to learn this lesson the hard way and have lost a lot of money in the process. Hopefully you can avoid those same mistakes by following some of the tips outlined in this article.

Photo credit:
Rental Realities via Flickr – Creative Commons Attribution License

Amanda Abella is a personal finance expert, speaker and writer. She is the author of the book 'Make Money Your Honey: A Spirited Entrepreneur's Guide to Having a Love Affair with Work and Money.'

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