Rental Property Café™- Episode 2 - Ask Yourself These 6 Important Questions When You Inherit PropertyFinancial Planning
I've invited my friend Veronica Woods to join me in an ongoing conversation about building a real estate toolkit called The Rental Property Café™. Please send your ideas and suggestions for topics to firstname.lastname@example.org.
What you'll get from this video podcast:
You've inherited property. Now, what?
Cynthia Meyer: I'm so happy to be here this morning with you in a Rental Property Cafe. I'm Cynthia Meyer with Real Life Planning.
Veronica Woods: And I'm her cohost Veronica Woods with Daniel Woods Real Estate. So today we're going to talk about what to do. If you inherit real estate, it could be a windfall. It could be something that makes you really nervous about, are you doing the right thing in order to improve your financial situation? So we came up with six questions that you should ask yourself and be firmer on your answers before you decide what is the best course of action. Of course, when you inherit real estate, there is more than one option. The things you can do: you can live in the property, you could keep it and rent it out, or you could sell it. So the six questions that we came up with are all things that will help you figure out the best course of action for you.
Cynthia Meyer: So I'm looking forward to here. What's what do you think is the most important one?
Veronica Woods: So I don't know if they're all probably equally important. I wouldn't say there's one is more important than, the next one, but let's jump into with that jump into the first question on our list, not in order of importance.
And that is an interesting thing. People always ask, what is the one thing that can make the differentiation between whether you should keep or sell a property. And I don't think it comes down to one question, but I would say that, most of the questions that we're going to cover really don't cover the situation of living in the property.
[00:02:00] Question #1: IS EVERYONE ON THE SAME PAGE ABOUT WHAT DO WITH THE INHERITED PROPERTY?
So we'll just keep living in the property on the side. But these questions really eat at the heart of should you keep it as a rental or should you sell it? So with that, the first question that we came up with is, everyone on the same page about what to do? Because I'm saying you inherit property, but it isn't just you. Do you have siblings or are there other relatives that your family member left the property to, and it's really important.
I know I've run into a lot of situations where maybe at the early stage, in the process of inheriting the property, everybody's on the same page to keep it let's say. And then maybe a year or two later, maybe you're having trouble making decisions and there are disagreements and oh, I thought you said you were going to do that and I'm doing everything and all these full kind of family debates and drama come up.
And because you don't realize that you're really in business with your family, and if you, your family [00:03:00] can't gel as a business and figuring out how to divide risk responsibilities, and who's accountable for what, then it could be a lot more family drama, almost like when your loved one passed away. So it's really important that everyone's on the same page of either keeping it or selling it and then how you're going to proceed in executing
that is really important. I know Cynthia you have something else to add on that one?
[00:03:32] What if one sibling is living in the property?
Cynthia Meyer: I want to give a quick example. That I've seen many times in my work as a financial planner, and that is when somebody, when a siblings inherited property and one of the siblings was living in the property.
Maybe they were living in the property, taking care of mom or dad before he or she passed away. It feels like their house. But the siblings inherited the equal shares, for example and the parents hadn't been crystal clear in their estate plan about what they wanted to happen. That can get really complicated.
And sometimes one sibling is in a better financial position than the other, and they have different goals for what they want to do. So I think you're right to bring this up first, Veronica. This is this is really important. Is everybody on the same page?
Veronica Woods: Yeah, that was a good example to, to bring up.
There's a whole different element when one family member lives in the property because they may think by the fact that they live in the property, that they, that kind of designates a little bit more in the decision-making or maybe they want the right to keep living in the property and all that has to be solved because ultimately that is a part of the estate and part of the family wealth.
And so everyone has to just be in agreement of how the kind of preserve everyone's portion of the inheritance.
[00:05:00] Question #2: How does this fit into your personal financial goals?
Cynthia Meyer: Yeah.
Very good point. Very good point. And then the second thing that we would encourage you to ask yourselves if you've inherited property, is how does this all fit into your personal financial goals?
I say this all the time to clients and in my blog. Are you financially ready to be a landlord? And do you have the cash or the financing to pay off that sibling? Who doesn't want to be a landlord or has other financial needs or goals? Do you have the cash to pay for needed repairs, right?
The thing about real estate is that it was an investment that has ongoing carrying costs in time, money and effort. Are you ready and willing to do that? Are you prepared to do that? Then another thing that I think is important is what would you do with the money if you sold it?
What goal would you apply that to? Are you trying to send your kids to college or pay off debt or put it towards your own retirement plan or paying down your own mortgage? So, talking to a financial planner, for example, if you have one, about how does this fit into to my particular goals?
It will be an important part of the decision making process. What have you, seen, Veronica?
Veronica Woods: I want to just piggyback on what you said about preparing for expenses of managing the property. A lot of times, if you didn't live in the property or you weren't a part of helping -- let's say it is a rental.
You weren't participating in helping that family member run that part of the rental business. You may not know what the actual current condition of the property is. Maybe there are some major expenses that need to take place in the short term [00:07:00] in order to make it rentable. Or do you have the reserves to do that or just thinking about the size of the building and just... properties don't have the same maintenance costs.
[00:07:13] What are the maintenance costs for an older home?
Older homes, especially in, my area, in the Philadelphia area, there's a lot of older homes, and generally the maintenance costs on those homes are higher. And so you just have to really think about if it's a case where the family needs to raise enough kind of maintenance reserves to take care of certain things.
Are you financially able to do it?
Cynthia Meyer: Yeah. Good point.
[00:07:41] Question #3: Is it a good investment for YOU?
Veronica Woods: Which kind of segues into our third question of, is it a good investment for you? And I define that in terms of, if it's a rental property, you're talking about cash flow. So there are plenty of people in the rental business, but they're actually losing money every month.
And if you're in the rental business, your job is you want to have some positive cash flow at the end of the month after you've paid the operational expenses, your taxes, if there's still a mortgage. So the first assessment is if the property currently making money today.
And if not, you have to make a decision, whether it makes sense to try to make it back profitable or not, or are there ways for you to increase the rents? If you do certain repairs or attract a better tenant what better systems. An example, I have known a number of folks, let's say you inherit a portfolio of properties. And I have a friend who inherited a portfolio of properties across a few different states, but there was, there were some that [00:09:00] were doing a lot better than others.
In fact, one of their properties hadn't been lived in years because it had major fire damage. And so I advised like maybe it makes sense to just sell the property that this is going to take extensive money to make it back rentable. If you're looking at it from a portfolio perspective, maybe you take that money, invest in the reinvestment, other properties, they improve those profits.
Sometimes you really just like any investment, you just have to figure out where your money best spent even amongst the real estate that it may make sense to reinvest - take money from one investment is losing money and reinvest it in something where you have the potential to grow and create more wealth.
[00:09:54] Run the real numbers - just don't do it on the back of an envelope.
Cynthia Meyer: And I would say it, and I think we're in complete agreement about this is that running the numbers, just don't do it on the back of the envelope, right? Run the actual numbers in a spreadsheet or a rental property calculator to make sure that you are going to get that positive cash flow.
And know that you may have to refinance that you're going to have to refinance that mortgage. For example, if it was held by the person that passed away. So does this actually make sense financially as a standalone investment? Would you buy it today if if you were looking on the open market, I think could be an interesting way to think about it.
[00:10:36] The big mistake many rental property owners make
And as a financial planner, one of the biggest mistakes I see people make that own rental properties is that they never evaluate whether it's profitable or not. They, think, oh, maybe I own this property in a highly appreciating metro area, for example. But they haven't looked to see if it's adding to...or draining their net worth.
Veronica Woods: That's a good point because depending on the market there's some in my Philadelphia area, there are some communities that are just great at cash flow, but you're not going to count on a lot of their appreciation. And when people make that initial investment, they know that going into it.
And there are some other neighborhoods where maybe you could accept a lower monthly cash flow because you do have the upside. And I think sometimes when you in here the property, you may just jump into assuming that everything's going to be profitable, but you do have to do the same kind of due diligence or calculations to figure out what your potential upside could be on that monthly cash flow and what you can do to improve it. So sometimes hiring a professional property manager may allow you to figure out maybe ways you can cut expenses here and there, as well as maybe other ways that you can monetize the property as far as on the top line, which is always a little bit more difficult, but I think answering that question. Are you losing money on this investment? A lot of times people gloss over it and again, in order to really make the decision, whether you should keep it or sell it, you got to answer that question. So of course we love the, "is this a good investment" question, but let's move on to the fourth one, which I have on my list to review.
[00:12:30] Question #4: How does owning a rental property work with your lifestyle?
You could inherit a property that has a bad tenant. And that may require a lot more kind of re-engineering the rental property process than if, you had a tenant that was paying has been paying top of the line rent for 10 years and a lot of time family members jump into bad situations because maybe, quite honestly your relative wasn't doing a great job managing the property. So I think people assume because you own property that you're naturally going to be a good landlord, or that you're doing a good job on the operational side, but everyone really is not necessarily cut out to be a landlord by their personality.
They just don't want to
Cynthia Meyer: Sure.
Veronica Woods: Purely see it as a business, make the tough decisions to get. Maybe it's a family friend. I see a lot of, oh, this is a family friend that lives there. He's been there for 10 years. We know he's paying low rent. We don't know what to do with him because uncle Larry has kept him there for so long.
[00:14:00] Are you a hands-on or hands-off investor?
Coming into that situation, do you want to, do you have the personality or [00:14:00] the like the gut check with yourself. Can you make that hard decision to get that person out. Then it could be just purely: do you live too far away to do a good job and oversee people for far and are you comfortable with finding someone that can be your eyes and ears on the ground?
So, that's really important. And then let's say if you are, even if you are close enough, you do have to think about what your day-to-day lifestyle is. Are you willing to get that call on the weekend that there's a leak not to say that everybody has to be that hands-on.
If you don't want to. I like to say, you're either managing tasks or you're managing other vendors, but you're still involved in managing your rental property business. But again, these kinds of operational considerations, it definitely ties into financial because you may say can I afford to hire a property manager?
But that's why running the numbers is important because you want to have a line item with property management even if you do want run it yourself. But ultimately you have to think about, am I the best person equipped to do it? And if not, then how does that weigh into my situation, my decision, whether to keep it or sell it.
Cynthia Meyer: Yeah. And I think weighing in on the idea of what am I going to use a professional property manager or not. Even if you use a professional property manager, you still have to spend some time managing your rental property finances, and coming in and reviewing what your property manager is doing and recommending.
[00:15:56] It is an investment that takes time to manage.
It's interesting that you say some of these situations that you've come across in terms of people trying to evaluate whether it works for their lifestyle or not. And I guess the other thing I might add that I see frequently in my practice is that might change over time, whether it works for your lifestyle.
Somebody that thinks, oh, I'm going to they let's say they inherited duplex. I'm going to live on one side and I'm going to rent out the other side. They might not want to do that after they have kids, for example, and they want a little bit more privacy. Or maybe somebody that has a portfolio of rental properties as they move into retirement, they may move it from self-management to managing with a property manager, or they may want to diversify into other kinds of real estate at that time because it, it, doesn't fit their goals for their retirement, for example, in terms of how they want to spend their days.
This can change over time.
Veronica Woods: Yeah, that's important.
[00:17:08] Question #5: Would you be happy with the money you could make if you sold it now?
Cynthia Meyer: That, brings the big question then number five, which is would you be happy with the money you could make if you sold it now? If you inherit a property. And I would encourage folks, even if they feel very attached to a piece of inherited property, to look at their different options and compare and contrast, there's no harm in exploring possible paths and seeing which one makes the best sense for you. That's a big part of the financial planning process. What are your options if you don't want to keep it as a rental and then seeing a skilled Realtor who can help you look at the comparables.... see how much you could get for the property. Do you have to make any improvements in the property before you sold it?
And how much time, effort, and money is that all going to take? Getting some professional guidance on that. And then the other thing is what are going to be the tax consequences if you sell it? If you're selling a property pretty soon after you inherited it, there's probably not too much variation in the price from how it was valued in the estate process.
But if you're selling it many years after you inherited a property, you might have some gains. And so what are the tax consequences?
[00:19:00] Are you holding on to the property as a keepsake?
Veronica Woods: Yeah, that's good. I think there's a good point. It's only you who can decide what's an acceptable profit. And I think there's a lot of, sometimes there's a lot of pressure on people just from the legacy. Let's say, especially if there are rental properties and you want to carry on the family legacy and there might be an emotional thing to that. But you really have to at least find out what the property is worth today. As any property owner, you always want to do a check-in on what something is worth, but I will say that keeping the property as a keepsake is not a good idea. So I've seen people because they can't decide is more like a museum or storage for family mementos. And that's how you actually could actually decrease the value of the property. So you really need to decide, is this truly gonna be the rental and something that we can sustain and continue to generate more wealth?
Or does it make sense to you? Take your money off the table and to, Cynthia, your point, sometimes the current market may not support a sale right now. Yeah. As we're recording this video, the market is very hot. So I would say probably don't have that problem right now, but there are times where maybe you inherited a property after maybe there's a little dip in the market and maybe it makes sense to hold out for a few years for the market to recover. So, those are things to consider.
[00:20:10] Question #6: Who's on your team?
Cynthia Meyer: And that brings us to our final point, number six, Veronica, which is who's on your team, right? It, there are really complex issues, which cross multiple disciplines.
We want input from your Realtor, your financial planner, your CPA, maybe an attorney. You're going to talk to the executor of the estate if that's not you. There are a lot of moving parts in the decision-making process that have financial legal tax implications. Don't wing it.
Now many people who are avid and experienced real estate investors do like to do part of that process themselves, but you can't do everything yourself. You've got to get some professionals together and make sure that everybody's [00:21:00] collaborating and is on the same page you're all singing from the same song sheet about what is the next action. So what you decide for example, has in one state may have tax implications in another state, depending on where the property is located. And know, you want to get really clear and have a clear and cohesive strategy. What have you seen?
Veronica Woods: I've seen that a lot of trusted advisors, we want to collaborate, but we have to have those introductions. So if you know up front that it actually is helpful for your accountant, your attorney, your financial advisor, your Realtor, should all be speaking together, if you can help facilitate that. That makes it a lot easier. And I know I try to even help my clients ask those questions of themselves. Like how have you talked to your accountant about that? Have you talked to a financial advisor about that? And really just think about, we're asking you those questions, not to place doubt in your mind, but just even highlight the complexity and why it's important to have everyone on the same page. And then quite frankly, sometimes you may need to upgrade part of your team if maybe part of your team is not really, can't support you in the real estate investing part of your life let's say. And this happens to all real estate investors, whether you inherited the property or not, but you may have new issues now.
And so you want to make sure that you have the right counsel that can support you now in this new arena.
Cynthia Meyer: Yeah that's a very good point. A common question I'm getting recently with highly appreciated prices is people are asking questions about 1031 exchanges, which is a tax-deferred exchange in a real estate transaction. And you want to make sure if you're thinking about something like that, that you have people on your team that understand all the implications of that process.
So is there anything else that you want to add to those six very important questions that we want people to think about if they inherit property?
Veronica Woods: I would like to, I guess, sum it up. I know we've been talking simplistically about keep it versus sell it and there's no right answer. There are different scenarios where maybe you keep it, but keep it and you need to do this or sell it and you to do that. And I actually put together a guide that I will make available in the description below that helped me think about whether you keep it or sell it, but just make the point of there's no right answer is really, I think a point you made earlier. A certain answer made be right for you at this point in your life, but be ready to revisit it in two to three years, five years. I don't know what the time horizon is, but it's something that you may need to evolve just as your priorities in your life change.
Cynthia Meyer: So Veronica, as usual, you're one of my favorite people to talk to you and thanks very much for coming into the Rental Property Cafe this morning. Cheers! And for those of you who haven't seen our podcast launch, it's coming up next. So make sure to go back and watch that again. And hit subscribe to get notifications of our next podcast and leave us some comments.
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