A loved one passing is always a solemn event. After a relative passes on, they often will their assets to family members. People will often leave their primary residence and rentals, if they have them, to their relatives.
While this gesture is kind and thoughtful, it also sometimes creates financial and personal confusion for the recipient. People who inherit a house – especially one generating income like a multi-family rental – frequently aren’t aware of all the tax and legal implications surrounding the inheritance. Complicating matters further, sometimes these properties are in different states, requiring you to fly in between to do anything with the home. For example, imagine the potential logistical challenges that could arise from inheriting a multi-family rental in New York while living in Los Angeles.
What should you do if you inherit one of these multi-family properties? Only you can answer that question for your particular situation. What we can do, though, is look at everything you should consider when inheriting a multi-unit rental property.
Do You Want to Keep It or Sell It?
The first question to ask is if you even want to be a landlord? HUD research estimates that there are between 10 million and 11 million individual investor landlords in the United States, so an individual owning one of these properties is a road well-traveled legally and logistically. You would certainly not be alone.
If you decide to keep the property, there are some basic tax and logistical implications that you should consider.
Should You Hire a Property Management Company?
You may wish to consider hiring a property management company. These companies handle most aspects of running the rental, including finding tenants, starting leases, managing move-outs, and providing maintenance services for people’s units. On the downside, these services can be pricey. Expect to pay anywhere between 4% and 12% of your total rent intake. The convenience of not having 3 am calls to fix the toilet, though, is probably worth it.
If your inherited property is far away, hiring a management company is your only option. You can’t hop on a plane every time there are issues since that could quickly become prohibitively expensive. Keep this cost in mind if you elect to keep an out-of-state property.
Should You Incorporate or Not?
Suppose you inherit the property and retain it as an individual owner. In that case, you’ll make your tax time most straightforward as you need to declare the income and expenses on your Schedule E. If you e-file your taxes, TurboTax handles much of this for you. If you have an accountant, then anyone at H&R Block or the other tax preparation firms will know how to fill out the Schedule E correctly.
The problem with personal ownership is the fact that there is always a potential liability. If something goes wrong with the rental property, the tenants will sue you individually. If they win a judgment against you, it could put you in bankruptcy.
To avoid this, some people open an LLC or corporation to shield their assets from a lawsuit. The full legal and financial nuances are beyond this article’s scope, but it’s not as straightforward as “open company, transfer multi-family home.” For example, having real estate in a corporation can be problematic in terms of taxes when the company tries to sell the property.
Consult a tax advisor to provide you with rock-solid advice before forming an LLC or a corporation to shield yourself from potential liability.
Can You Reasonably Commit the Time Necessary?
Even if you use a property manager, owning a multi-family unit will require some time. You’ll have to sign new leases, approve repairs, and potentially contact maintenance or repair people. It’s not a full-time job by any means, but it does require some effort.
If you don’t feel like you can commit the time necessary to be a landlord (perhaps you work two jobs or have many family obligations), then you might have to consider selling the property instead.
What Are the Ways to Sell a Multi-Unit Rental Property?
If you feel it would be best to sell your inherited rental property after reviewing your financial and tax situation, that’s certainly an option. Many people tend to do this because they don’t want to bother with the legal and financial complexities of being a landlord for inherited property.
Usually, though, selling an occupied multi-unit rental property isn’t as effortless as selling a traditional house. There are only a couple of ways to sell the property.
Sell the Home Using a Real Estate Agent
Some real estate agents have experience selling multi-family homes. It’s certainly not as common as selling traditional single-family properties, but some agents have it. The process is usually the same as a conventional home sale. Your agent will make the property look fantastic, take photos, post a listing, and showcase it to potential buyers. After receiving offers, you’ll make a decision and choose the offer that works best for your situation.
The problem with rental units is that most of the time, people inherit them with tenants already there. Any sale, therefore, must balance tenants’ rights with landlord rights. Most jurisdictions permit selling a home with tenants occupying it during a situation like this.
However, your choice of buyers can sometimes become very narrow. FHA and VA loans require the buyer to occupy one of the residences. If tenants are occupying all units, there’s a possibility that the buyer cannot occupy one and thus cannot qualify for those loans. That removes a pool of buyers from the market.
Then there’s a question of rent and the condition of the building. If it’s dilapidated and the buyers don’t feel the rents will cover the necessary repairs, it will be hard to sell it.
A real estate agent could take 3-6 months, total, to sell your rental home. While the agent works to sell your property, you’re liable for all expenses, including property taxes, maintenance costs, etc. If you live out-of-state, this might be a logistical nightmare to do without hiring a property management company on a short-term contract.
Sell the Home to a Cash Investor
Your other option is to tell the home to a cash investor. You’ve likely seen advertisements for “we buy houses” companies in your city. These companies have a few advantages over selling through a traditional real estate agent.
Since there are no agents involved in the transaction, there are no real estate commissions when selling to an investor. And, since there are no loans involved, cash investors can close very quickly. Some companies can close in as little as seven days! (Yes, you can call them on Monday, and by next Monday, you can be walking away from the deal with a check!)
The process of selling to a cash investor is quick and relatively painless. Contact the investment company and give them the preliminary details of your home. Most of the time, they can give you a ballpark figure over the phone. If everything sounds good, schedule a time for them to come out to look at your property. They’ll inspect it to make sure it’s similar to what you stated over the phone.
After the inspection, they’ll write up a fair offer for your place. You don’t need to do any repairs or any fixes to the residence before the offer. They’ll also take your property with full occupancy, partial occupancy, or with no tenants.
Inheriting a Multi-Unit Rental Property Requires Some Considerations
Inheriting a multi-unit rental property isn’t a straightforward affair. You’ll first need to decide if you want to keep it or sell it. If you’re going to keep it, be aware of the potential legal, tax, and other financial pitfalls of rental property ownership.
If you want to sell it, you can do so with a traditional real estate agent or a cash investment company. If you’re looking for a fast, fair, guaranteed offer, go with the cash investment business. If you’re looking for a slower but guaranteed market-rate offer for your property, you can use a real estate agent.
Take a look at your financial situation and figure out which option works best for your household!