So you’ve just inherited property, or you’re waiting for your property to complete the probate process. (If you need guidance on probate, check out our homeowner’s guide.) Now you’re considering renting it out. Renting out an inherited property can be a great way to build income, but there are key tips, benefits, and pitfalls you need to know before becoming a landlord. Let’s dive in!
Why Rent a Property?
If the property is still in probate and you have the financial capacity to cover the expenses (if not, selling may be your best option), renting can be a good way to go. Here are three main reasons why renting could be a viable option:
- A second stream of income
- Potential for appreciation and wealth accumulation
- To pass down an asset to future generations
Let’s explore each of these to see if renting is right for you.
Is There Cash Flow From Renting Out the Property?
A common misconception among new landlords is thinking cash flow equals rent income – mortgage. This is far from the truth! The actual formula for cash flow is:
Cash Flow = Rent Income – Mortgage – Maintenance – Capital Expenditure – Property Management Fees
Many first-time landlords make the mistake of thinking they’ll have cash flow, only to be blindsided by unexpected expenses—like a broken water heater—that drain their funds. Soon after, the property starts deteriorating, tenants move out due to unaddressed issues, and the costs pile up.
So rule #1: Make sure there is ENOUGH cash flow.
Rule #2: Properly budget for maintenance and expenses.
What Maintenance and Expenditures Should You Plan For?
There are two types of costs landlords should prepare for: annual maintenance costs and capital expenditures (CapEx).
Yearly Property Maintenance Costs
These are regular upkeep tasks that require annual attention and can cost you out-of-pocket:
- Lighting: Be prepared for tenant requests for light bulb replacements.
- Gutter Cleaning: Clear gutters and downspouts to prevent water damage.
- Roof Inspections: Ensure the roof is in good shape to avoid costly repairs.
- Landscaping: Regular yard care, including mowing, pruning, and seasonal tasks.
- Pest Control: Periodic checks for termites and other pests.
- HVAC Maintenance: Regular air filter changes and system servicing.
- Plumbing: Look out for leaks, slow drains, or running toilets to avoid expensive repairs.
- Safety Checks: Regular tests of smoke and carbon monoxide detectors, and checking fire extinguishers.
- Appliance Maintenance: Clean and service appliances like refrigerators and washing machines.
Capital Expenditures (CapEx)
These are large, one-time costs for property improvements and major repairs, and should be planned for:
- Roof Replacement: Roofs wear out after 20-30 years.
- Window Replacement: Older windows may need replacing for energy efficiency.
- Siding and Painting: Repainting or replacing siding keeps the property in good condition.
- HVAC Systems: Furnace and air conditioning systems need replacement after 10-15 years.
- Water Heater Replacement: Water heaters typically last 8-12 years.
- Plumbing and Electrical Overhauls: Updates might be needed, especially in older homes.
- Flooring: Carpets and tiles wear out over time.
- Kitchen and Bathroom Renovations: These can add value and appeal to your property.
- Appliance Replacement: Major appliances eventually need replacing.
- Foundation Repairs: Any issues with the foundation must be addressed quickly.
- Septic Systems or Sewer Line Replacements: If your property isn’t connected to public sewer lines, these systems might need major repairs or replacements.
Planning for CapEx can help you stay financially prepared for inevitable, costly repairs.
Getting Good Property Management
Vacancies and unexpected repairs will happen—it’s essential to have reserves set aside (we recommend 2-3 months of mortgage payments) to cover these gaps. A good Property Manager (PM) can ease the burden and take the stress out of managing the property.
- Cost: On average, property management fees range from 5-10% of rental income.
Managing the Property Yourself
If you opt to manage the property yourself, keep in mind this can be time-consuming. Many experienced investors hire or create their own property management teams to oversee their growing portfolio. If you plan to manage the property yourself, here are a few things to consider:
- Proper Legal Contracts: A clear lease agreement is crucial for both landlord and tenant protection.
- Property Maintenance Schedule: Regular inspections and upkeep tasks.
- Rental Deposit Clause: Outline conditions for the security deposit.
- Cleaning Company: Consider having a cleaning company on standby for tenant turnover.
- Reliable Network of Contractors: Have reliable tradespeople for maintenance and repairs.
- Emergency Contact List: For urgent issues like plumbing or electrical emergencies.
- Tenant Screening Process: Run background checks, credit reports, and reference checks.
- Property Insurance: Adequate insurance coverage is essential for damage, liability, and rental income loss.
- Knowledge of Local Laws: Familiarize yourself with tenant laws, fair housing regulations, and other rental-specific rules.
- Accounting System: Track rental income and expenses with reliable systems (software or manual).
- Rent Collection System: A clear, consistent method for collecting rent.
- Eviction Procedures: Know the legal steps involved in eviction, should it become necessary.
- Regular Communication: Stay in touch with tenants to address any concerns promptly.
- Move-In/Move-Out Checklist: Protect both parties by noting property condition during tenant transitions.
- Inventory List: Track furniture and appliances, if applicable.
- Safety Protocols: Ensure smoke detectors, fire extinguishers, and carbon monoxide detectors are in place.
- Pest Control: Routine pest inspections and treatments can prevent infestations.
- Cash Reserves: Keep an emergency fund for unexpected repairs or vacancies.
- Marketing Strategy: Use multiple platforms to advertise the property and attract quality tenants.
- Tenant Welcome Pack: Provide new tenants with essential property info and emergency contacts.
- Property Management Software: Streamline tasks with software that tracks rent, maintenance requests, and communication.
- Market Rate Updates: Keep track of local rental rates to ensure your property is competitively priced.
How to Find GREAT Tenants
Finding good tenants is key to the success of your rental. Follow these tips to attract and retain the best:
- Location: Choose neighborhoods with tenants who take care of the property.
- Iron-Clad Lease: Make sure tenants fully understand their responsibilities and your expectations.
- Marketing: Advertise your property on platforms like Zillow, Redfin, and MLS. Don’t rely on just Craigslist.
- Great Photos: Be honest in your listing photos; don’t mislead potential tenants about the property’s condition.
- Stay Organized: Keep all your records in order, maintain regular upkeep, and ensure the property stays clean and attractive.
Final Thoughts
Renting out an inherited property can be a rewarding venture if done correctly. It’s essential to budget for maintenance, anticipate capital expenditures, and ensure you have a solid property management system in place. By doing your homework and setting realistic expectations, you can make the most out of your inherited property while minimizing headaches down the road.
Good luck, and if you have more questions or need advice, don’t hesitate to reach out!