Inheriting a property can be significant and laden with emotional and financial implications. You might sell the property or move into it yourself. You might also consider turning an inherited property into a rental property.
This strategy might offer a steady income stream, various tax advantages, and the potential for property appreciation. But can you transform this windfall into one that keeps generating income? Can you turn an inherited property into a rental opportunity?
Let’s explore this idea.
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Understanding inherited properties
An inherited property is one that you receive as a beneficiary following the original owner’s death. These properties may have sentimental value, often accompanied by memories and emotional connections.
However, the financial aspects of inheriting a property are equally important. You might face decisions regarding:
- Mortgage balances
- Property taxes
- Maintenance costs
These factors should be evaluated carefully before converting the property into a rental.
The first step is assessing its current condition and value.
Assessing the property
Begin with a thorough property inspection to identify any necessary repairs or upgrades.
This inspection should cover all major systems and structure elements, including:
- Plumbing
- Electrical
- Roofing
- HVAC
- Foundations
- Woodwork
Addressing these issues upfront can prevent costly repairs and make the property more attractive to potential tenants.
Consider having a professional appraise the property to determine its market value. This valuation will help you set a competitive rental price and understand the potential return on investment.
Your evaluation should factor in the property’s current state and the cost of any improvements needed to make it rental-ready. You should also understand the local rental market.
Rental market analysis
Start by researching rental demand in the area where the property is located.
High demand often translates into higher rental rates and a larger pool of potential tenants. Conversely, low demand might require more competitive pricing and additional marketing efforts.
Analyze average rental rates for similar properties in the neighborhood. This comparison will help you set a realistic and competitive rental price.
Examine neighborhood trends, such as crime rates, school quality, and future development plans, as these factors can influence rental desirability and property value.
Legal and tax considerations
Transferring the property title is an essential legal step. This can be straightforward or more complex, depending on the estate planning and probate process.
But the bottom line is to ensure the title is properly transferred to your name to avoid legal issues later.
Taxes
Turning an inherited property into a rental involves understanding capital gains tax and depreciation.
Inherited properties typically benefit from a stepped-up basis, which means the property’s value is adjusted to its market value at the time of inheritance. This adjustment can minimize capital gains tax if you decide to sell the property in the future.
Additionally, as a rental property, you can depreciate the property’s value over time, reducing your taxable income and increasing your overall return on investment.
By carefully navigating these legal and tax considerations, you can optimize the financial benefits of converting an inherited property into a rental, ensuring a smooth and profitable transition.
Setting up the property for rental
Start by addressing any necessary repairs and renovations. This might include:
- Fixing leaks
- Updating outdated fixtures
- Enhancing the property’s curb appeal
While these improvements require an initial investment, they can significantly increase the property’s rental value and attract high-quality tenants.
Ensure that the property is:
- Clean
- Well-maintained
- Has a neutral decor that appeals to a broad audience
A well-maintained property not only commands higher rent but also reduces the likelihood of tenant turnover, which can be costly.
Create rental agreements
Have a comprehensive rental agreement ready for when your first tenant becomes available.
This document should outline the terms and conditions of the rental, including:
- The rent amount
- Payment due dates
- Maintenance responsibilities
- Policies on issues like pets and smoking
Setting a competitive rental rate based on your market analysis will help you attract tenants while ensuring a fair return on your investment.
Lending options for inherited properties
Financing an inherited property to turn it into a rental can provide additional funds for necessary improvements or renovations.
Traditional mortgage lenders and hard money lenders are two primary sources of financing.
However, hard money lenders can offer more flexible terms and faster approval processes, which can be beneficial if the need for quick access to funds arises.
Irrevocable trust property
Securing financing can be more complex when dealing with an inherited property held in an irrevocable trust.
Lenders may view trusts as higher-risk borrowers, and the approval process might involve additional documentation and legal hurdles.
However, some lenders specialize in these loans and can guide you through the process. It’s crucial to work with a knowledgeable lender who understands the intricacies of trust properties.
Property management
Consider whether you want to self-manage the rental property or hire a property management company.
- Self-managing allows you to save on management fees and have direct control over tenant interactions and property maintenance—but it also requires a substantial time commitment and a thorough understanding of landlord-tenant laws
- Hiring a management company can alleviate much of the stress associated with being a landlord, such as:
- Tenant screening
- Rent collection
- Maintenance
- Legal compliance
While hiring a company comes at a cost, it can be worth the investment—especially if you have multiple properties or limited time.
Turning an inherited property into a rental property: The bottom line
Converting an inherited property into a rental can provide significant financial benefits, including a steady income stream and various tax advantages.
You can optimize your investment by carefully assessing the property, understanding the local market, addressing legal and tax considerations, and choosing the right management strategy.
Marquee Funding Group for rental income solutions
If you’re considering turning an inherited property into a rental, submit your loan scenario to Marquee Funding Group for expert advice and loan options.
Our team can help you find the right financing solutions for an inherited property and enable you to maximize the potential of your new investment.