Inheriting a house can bring a mixture of emotions from sadness to feeling overwhelmed. Figuring out if it’s better to sell or rent an inherited property will depend on your personal situation and the home you inherited. If the house is in need of costly repairs or located out of state, selling may be the best option. But if you have sentimental attachment to the home and the mortgage is paid off, it might be worth renting it out or living there for a while. Before making any decisions about what to do with your inherited property, check out our guide comparing if it’s better to sell or rent an inherited house.
- Selling an inherited property can leave you with cash for other investments but you may miss out on potential appreciation.
- Becoming a landlord could be a fruitful investment for an inherited property if you’re prepared to manage the rental and tenants.
- Property inherited out of state can be turned into a rental by hiring a management company, or it could be sold to an investor.
Table of Contents
1. Should I Rent an Inherited Property?
a. What is the One Percent Rule?
b. How to Calculate Rental Income
c. Other Considerations for Renting an Inherited Property
2. Should I Sell an Inherited Property?
a. Selling Inherited Home with an Agent
b. Selling Inherited House FSBO
c. Selling Inherited Property to an Investor
d. Other Considerations for Selling an Inherited Property
i. What if My Inherited Property has Expensive Repairs?
ii. Can I Sell My Inherited Property at a Loss?
Should I Rent an Inherited Property?
There are financial reasons to sell versus rent an inherited property, and there are fundamental considerations to weigh before committing to sell the home or become a landlord. Understanding what is involved in holding a rental property from number crunching to landlord duties will help determine whether renting an inherited house is worth your time.
What is the One Percent Rule?
When evaluating a property (whether it’s inherited or not) as an investment property, the one percent rule is a good place to start. The 1% rule is when the property produces 1% of the purchase price of the home in rental income each month. This rule becomes less applicable as the property value increases past $500k.
If the property is not hitting the 1% rule then it’s typically not a property that is producing true rental income each month after you account for property management, all expenses, repairs, and general maintenance. You shouldn’t plan for appreciation when running the numbers on an investment property, and that’s why this 1% rule is so important.
How To Calculate Rental Income
A rental property requires property management and maintenance. These roles can be the owner’s job, or they can be hired out and managed by the owner. A good rule of thumb is to account for property management as 10% of the rent and maintenance as an additional 10% of the rent. Subtract these values along with the PITI (principle and interest of the mortgage, taxes, and insurance) from the rent price(s). Don’t forget to account for any HOA fees, if applicable.
Does the value you are left with follow the one percent rule? If so, renting an inherited property could be a worthwhile investment if you’re willing to take on the responsibility.
Other Considerations for Renting an Inherited Property
If you’re an out of state inheritor the property management and maintenance costs are likely to increase as a property management company is necessary– this exact cost of the property management firm needs to be accounted for when running the numbers on the inherited property. Expensive repairs also need to be factored into the calculations, as the inherited home cannot be inhabited until it is in a rentable condition.
On the other hand, if your inherited house is in a vacation destination or metropolitan area with high demand, you can expect a lower vacancy rate and higher rent (although you should still be conservative when doing initial calculations). Inheriting a property in a high demand location unlocks the potential to successfully market on vacation rental platforms such as AirBnb rather than just getting long-term tenants into the home.
A final consideration for renting an inherited property includes the sentimental attachment to the home. If you are interested in taking care of the home and having tenants, renting will allow you to keep the home while providing financial benefit.
Should I Sell an Inherited Property?
When deciding if you should sell or rent an inherited house, take into account the cost to sell as well as your situation and the work required on the home. Selling inherited property can potentially take a weight off your shoulders and leave you with money and time for other investments, but selling could also cause you to miss out on potential appreciation.
Selling Inherited Home with an Agent
If you want the most amount of money for the property, listing on the MLS with a real estate agent is typically your best option. However, this comes with making repairs and getting the home into market ready condition, which your scenario may or may not make more difficult (e.g. out-of-state inheritance).
Selling with an agent begins with fixing up the property to market standards. If you choose this route, plan to get quotes from multiple contractors to get estimates on the cost of repairs. Account for the time it will take to make the repairs, as well.
Agent commissions are typically 5 to 6 percent , and they do not always include the cost to stage and market the home properly– these are questions to ask an agent about before deciding to list the home with him/her.
Closing costs for the seller are the final expense and are typically one to three percent of the home’s value (in a seller’s market, these costs can be negotiated to be covered by the buyer).
When all is said and done you are cutting roughly 8% off the sales price plus the initial contractor costs to sell the inherited property with an agent. This may seem like a lot, but if the home is in good to excellent condition, working with an agent will get you the most amount of money for the inherited house (even after all the fees).
Selling Inherited House FSBO
Selling your inherited home for sale by owner (FSBO) will require the most amount of work for the inheritor. However, you will have full control over the sale and can reduce the 5-6% agent commission. Selling FSBO is inconvenient if you don’t live nearby or you inherit a home with a mortgage, as selling by owner typically takes longer than working with an agent or investor.
Cutting down on the 5-6% fee charged by realtors comes with taking on the work yourself, and there are still costs involved if you want to get top dollar for your property. Examples of these costs include a flat fee MLS listing (~$300/month), professional photos (~$350), attorney for sales contract (~$250), and staging if necessary (~$1500/month). There will also be closing costs of 1-2% of the home’s value.
Selling Inherited Property to an Investor
Another option for the home sale is selling the inherited property to a local real estate investor who will buy for cash in as-is condition. There are no costs to work with an investor; however, if the inherited property is in excellent condition, you will not receive the highest offer for your home.
If your inherited home requires repairs or you live out of state, an investor is a great option and allows you to save time and money on agent fees or commissions as well as any repairs.
Other Considerations for Selling an Inherited Property
If your inherited property is in a location with high demand, selling with a real estate agent allows you to cash out if you don’t want tenants. But what if you’re in a more complicated situation such as inheriting a property with expensive repairs or multiple inheritors? There are more factors to consider and options to weigh when determining whether to sell your inherited property.
What if My Inherited Property has Expensive Repairs?
If the home you inherited requires many expensive repairs, including anything from a new roof and HVAC system to mold remediation, run the numbers on how much the repairs will cost. Typically the money you put into repairing the home will not be reflected in the price you sell the home for when it comes to major repairs. You can save yourself from paying for repairs by selling to a local investor in your area, as investors will purchase homes requiring costly repairs in as-is condition.
Can I Sell My Inherited Property At A Loss?
In the event that the inherited home is worth less than what is owed, consider a short sale. In this process, the lender agrees to let the property owner sell the inherited home for lower than what is owed to prevent the inheritor from having to make up any difference. Lenders need to approve these sales, as the inherited property is being sold “at loss.”
Final Thoughts: Should I Sell or Rent an Inherited House?
If you’re considering what to do with your inherited house, whether it be selling or renting, the best way to figure out if one option is better for you will depend on your personal situation, the home, and your goals. Inheriting property can feel sad while you mourn the loss of the person who passed it onto you, and it can also feel stressful, as you are left in charge of what to do with the home. Evaluate your situation financially and weigh the pros and cons of selling an inherited property versus renting to decide what’s best for you.