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Should I spend about $6,000-$8,000 in renovations to update a rental property that I inherited after the passing of my father?

I am 28 years old and I recently acquired a duplex in the Minneapolis, MN area (father passed away). This duplex has two units. A one-bed and a two-bed, both with one bath. The mortgage payoff amount is $90,000 and is valued at about $160,000 to $180,000. The one-bed duplex is rented already at $600 and I intend to rent the two bed for $900. The mortgage monthly payment is $970. The principle amount on the $970 is $350 a month. I currently make $62,000 per year and have no debts and I pay $1,250 in rent. I have $8,000 in an emergency fund and $3,500 in an investment account.

Is it smart for me to keep this rental property and rent both units considering I will have to put about $6,000 to $8,000 in renovation costs before the two-bed is ready to be rented?

Debt, Investing
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January 2019

Hello Friend and thank you for asking this question.

Also, sorry for the loss of your Father.  I also want to compliment you on having no debts.  

There are a few arguments that you can make for keeping or selling.  At the end of the day, I want you to be able to sleep at night and be ok with your choice.

On one hand, you have a nice little cash cow (on the surface at least).  For a $100,000 investment your annual return on that is $18,000 or 18% once you have this paid off.  I believe that Duplexes are a good opportunity to create wealth and most Real Estate Property is "just" 4 walls, a roof, Plumbing, Electricity, and a foundation.  If you can handle managing that your half way there.  What can be very difficulty is managing the people.  If you are comfortable with both of these issues, you are golden.  If either brings you great anxiety, then you may not be suited for being a landlord.

On the other hand, selling could be your better move.  To start, you receive a full step up in basis.  What this means is that if you sell the property for Fair Market Value (at date of death of the owner) you pocket the money tax free.  For example, if your father paid $100k for the property, and you inherited it now at $180k.  The $80K gain is tax free to you in essence.  You could invest this money in and argue that the growth will far exceed that of the rental with little to no hassle.  

I have more questions.  I am looking at the terms of the loan and it seams that your interest rate is quite high?  Well I can not see what it actually is, but at a glance $350 to principle does not resonate with a low interest rate.  At any rate, you might consider refinancing and cashing out funds to repair the property.  Again, if you enjoy getting your hands dirty, this might sound like a fun project.

At the end of the day, it depends on you, the condition of the home, and what your overall goals are.  I hope that my perspective supplies you with some ideas and direction on how to move forward.  

Best of Luck!

With love and regards,

 

Jose Sanchez, CFP®

 

P.S.  here are a few good links in favor of rental property:

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January 2019