Should I rent out inherited property?

I inherited a $200,000 home. I am in good enough financial standing that I do not need to sell the house to cover my living expenses and current mortgage. Would it be a good idea to keep house as a rental, even if I use a property management company? Or, should I sell the house and invest the money elsewhere?

Personal Finance, Asset Allocation, Real Estate
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August 2017

This is a Finance 101 question about comparative rates of return.  Here is how I would calculate it.  I assume you own the inherited home free-and-clear (no mortgage).  

Make a careful calculation of your net annual return from the house.  Take the gross rent; subtract property taxes, insurance, management fees, any utilities not passed along to tenants, and all maintenance costs.  In addition to repairs and ongoing expenses like landscaping, subtract a fraction of the major maintenance you know will be necessary some day.  (For example, if you think the house will need paint every 10 years, use 1/10 of the cost of painting as your annual cost.  Ditto 1/20 the cost of a new roof, etc.)  After all estimated expenses are totaled and subtracted from gross rent, you'll have a number.  That is the net return on your $200,000 investment.

Let's say that number is $8,000.  This is the return, before income tax, that you can expect annually.  Notice that it's 4%.  In addition to current income, project how much the value of the house will appreciate (a guess: 3%?).  Then, take into account your risks -- vacancy, deadbeat tenants, fire, tornado, what-have-you -- and decide if you are cut out for being a landlord.

If you can do better than 7% with equal or less risk, sell the house and invest the $200,000 elsewhere.

August 2017
August 2017
August 2017
August 2017