How to rent out an inherited property
Alright so you’re excited about being a new landlord.
You just inherited property… or you’re about while your property is in Probate (see our homeowners guide on probate in North East Ohio here)...
We’re going to dive into tips, benefits and warnings of being a new landlord in North East Ohio…
Why Rent a property?
If the property in question is still in Probate and you have the cash to pay for the process (if you don’t you might have to consider selling to pay for it), then renting is a very viable option if you’re up to it.
Mainly for three reasons:
1. A second stream of income
2. Possible appreciation and wealth
3. Pass down an asset
Let’s dive into each one of these and see if it’s worth it for you
Is there any Cash Flow from renting out?
A common mistake people make is thinking:
Cash flow = Rent income - Mortgage
This is far from the truth.
The real formula for cash flow is:
Cash Flow =
Rent Income - Mortgage - Maintenance - Capital expenditure - Property management
That’s the true formula for cash flow.
And MANY new landlords make this mistake of buying property and then end up being completely BROKE after something like a water heater breaks.
Then the property starts to deteriorate.
The costs start piling up.
Tenants move out because nothing is being fixed.
This is 90% of most landlord situations.
All because they were mistaken in believing that they actually have cash flow…
When they don’t.
So rule #1:
Make sure there is ENOUGH cash flow.
Rule #2…
Properly budget for maintenance and expenditures.
What type of property maintenance and expenditures?
There are yearly property maintenance you have to do (we’ll list them below), and there are big ticket items you must save for.
Here’s a list of yearly property maintenance that cost you $$ out of pocket:
1. Lighting: You’ll get lots of calls from tenants who can’t replace a light bulb (face in palm)…
2. Gutter Cleaning: Ensure gutters and downspouts are clear of debris to prevent water damage and foundation problems.
3. Roof Inspection: Check for loose or missing shingles, leaks, or any other damage that may lead to bigger problems down the line.
4. Landscaping: Regular mowing, pruning of shrubs, tree trimming, and refreshing mulch. Additionally, consider seasonal tasks like leaf removal in the fall.
5. Pest Control: Schedule periodic inspections for termites, rodents, and other pests. Even if no problems are visible, preventative treatments can be worthwhile.
6. HVAC Maintenance: Change air filters regularly and have the system serviced at least once a year to ensure efficiency and longevity.
7. Plumbing: Often you get plumbing issues like leaky faucets that have to be corrected. Look for any slow drains, leaky faucets, or toilets that run constantly. Addressing these early can prevent more expensive repairs later.
8.. Safety Checks:* Regularly test smoke detectors and carbon monoxide detectors, replacing batteries as needed. Ensure fire extinguishers are in working condition
9. Appliance Maintenance: Often, washers, dryers, water heaters, etc break down. Clean and service appliances like the refrigerator, dishwasher, oven, and washing machines to extend their lifespan.
Budgeting for these tasks ensures you can address issues before they escalate into more significant problems, saving money in the long run. Plus, a well-maintained property is more attractive to current and potential tenants.
List of capital expenditures:
Capital expenditures (CapEx) are the large, infrequent expenses that landlords should plan for as they relate to the overall improvement or maintenance of the property. These are not your typical monthly or annual operational costs but are essential for keeping the property in its best condition over the long term.
These things below are unavoidable.
They WILL happen sooner or later and they are PRICEY (A roof is at least $10,000).
Here's a list of capital expenditures landlords should budget for:
1. Roof Replacement: Roofs don't last forever. Depending on the material used, you might need to replace it every 20-30 years, sometimes sooner if there's significant damage.
2. Window Replacement: Older windows might need replacing to improve energy efficiency and aesthetics.
3. Exterior Siding or Painting: Whether it's replacing siding or repainting the exterior, it's an investment that can both protect and rejuvenate the appearance of a property.
4. HVAC Systems: Furnaces, air conditioning units, and other HVAC components have a finite lifespan, typically around 10-15 years.
5. Water Heater Replacement: Most water heaters last between 8-12 years, so you'll need to replace them occasionally.
6. Plumbing and Electrical Systems: Overhauls or major updates might be needed, especially in older properties that don't meet current codes or standards.
7. Flooring Replacement: Whether it's the wear and tear on carpets or damage to hardwood/tile, at some point, you might need a full flooring update.
8. Kitchen Renovations: This could include new countertops, cabinets, sinks, or a complete redesign to modernize the space.
9. Bathroom Renovations: Updating fixtures, tiles, showers, and tubs can enhance property value and appeal.
10. Appliance Replacement: Refrigerators, stoves, dishwashers, and other major appliances will eventually need to be replaced.
11. Foundation Repairs: Issues like settling or cracking can sometimes require significant repairs to ensure the structural integrity of the property.
13. Fencing: If the property has fencing, it might need repairs or total replacement after many years of weathering.
16. **Septic System or Sewer Line Replacement:** If the property isn't connected to a public sewer, septic systems might need major repairs or replacements. Similarly, sewer lines can become damaged or clogged.
When planning for capital expenditures, it's crucial for landlords to set aside funds regularly. This proactive approach ensures that they're financially prepared for these inevitable expenses, helping maintain the property's value and the comfort of its tenants.
Getting good Property Management.
Vacancies will happen (another “budget” you should set aside for -- imagine 2-3 months of having to pay for mortgage out of pocket).
A good property manager (PM) and take the headache off your plate.
The average cost of a PM:
5-10% of rental income
Managing a rental yourself
Because most landlords don’t have enough cash flow to pay for a PM, they’ll result in managing the property themselves.
Unfortunately this is not an ideal route if you want a rental property to be “handoff”.
Many professional investors create their own “property management” companies to manage all their properties. They have the volume of real estate where it makes sense.
Here’s a list of things to consider when managing your own property.
1. Proper Legal Contracts: Essential for protecting both the landlord and tenant. This includes a clear and detailed lease agreement, clauses for renewals, and any other relevant contracts.
2. Property Maintenance Schedule: Regular checks on the property, from annual inspections to seasonal maintenance tasks like gutter cleaning or HVAC servicing.
3. Rental Deposit Clause: Clearly outline the conditions for security deposit collection, holding, deductions, and returns.
4. Cleaning Company: Having a reputable cleaning company on standby for turnovers between tenants or for regular deep cleans can be invaluable.
5. Reliable Network of Contractors: This includes plumbers, electricians, handymen, landscapers, etc., who can attend to issues promptly.
6. Emergency Contact List: A list of essential contacts for emergencies, including local police, fire department, emergency maintenance services, etc.
7. Tenant Screening Process: A comprehensive system to vet potential tenants, including background checks, credit reports, and reference checks.
8. Property Insurance: Ensure that the property has adequate coverage against damage, liability, and potential rental income loss.
9. Knowledge of Local Laws: Familiarize yourself with local landlord-tenant laws, rental regulations, and fair housing acts to avoid potential legal issues.
10. Accounting System: A system (software or manual) to track rental income, expenses, and other financial aspects related to the property.
11. Rent Collection System: Whether it's through online payments, bank transfers, or checks, have a consistent and reliable method for collecting rent.
12. Eviction Procedures: Understand the legal process and requirements for evicting a tenant, should it ever become necessary.
13. Regular Communication: Keeping an open line of communication with tenants helps address concerns early and maintain a positive landlord-tenant relationship.
14. Move-In/Move-Out Checklist: A detailed list for inspections when tenants move in or out, ensuring any damage or changes are noted and addressed.
15. Inventory List: If the property is furnished, maintain a list of items and their conditions.
16. Safety Protocols: Ensure that smoke detectors, carbon monoxide detectors, fire extinguishers, and any security systems are in place and regularly checked.
17. Pest Control: Periodic inspections and treatments to prevent infestations.
18. Cash reserves: A financial cushion for unexpected repairs or vacancies.
19. Marketing Strategy: A plan for advertising the property, conducting showings, and drawing in potential tenants.
20. Tenant Welcome Pack: A package that provides new tenants with essential information about the property, local amenities, emergency contacts, etc.
21. Property Management Software: Useful for streamlining various tasks, from rent collection to maintenance requests.
22. Updates on Market Rates: Regularly check local rental rates to ensure your property remains competitively priced.
All these costs add up
Most professional investors have a rule of thumb to calculate all these costs:
40%-55% of rental income
Over the long run, that’s what it cost to hold a rental, 40% of the rental income.
So if you’re getting $2,000 a month in rental income, deducting $800 and depositing it to a separate bank account is a good idea.
If not… you’ll end up with no cash when you need it.
Do you have the cash flow?
As you can see..
You need to make sure you have the cash flow from the beginning to rent a property.
If a property rents for $2,000…
And the mortgage is $1,500…
According to the typical 40% budget rule of thumb…
You’ll end up with a:
NEGATIVE $300 in cash flow.
Meaning, you’ll have to pay out of pocket, $300 a month to support this property.
This is why most new landlords end up selling a property after 2-3 years.
They’re broke and don’t have the cash for unexpected repairs.
How to find GREAT Tenants
Tenants are providing your cash flow.
So it’s CRUCIAL to have a system of marketing and screening for quality tenants.
(NOTE: Make sure you consult with a real estate attorney to understand the tenants laws)
Location is the number factor -- If your rental is in a neighborhood where the majority of houses have tenants… than it’s most likely going to bring less quality tenants (tenants that don’t care about your property)
Have an iron-clad contract -- and make sure that the tenants read and understand everything. You want to highlight what’s expected of the tenant (and expected and not expected of you)
Market your property in multiple ways -- Don’t just put up a craigslist ad (that’s probably the wrong location to attract quality tenants). Put up a listing on Zillow and Redfin (and every other “Realtor listing” site). Pay a flat fee to the MLS for a listing. Put up a sign. Have an in your local newspaper. Tell agents and realtors (they do expect a commission for bringing you a tenant).
Take great photos but don’t fool -- Pictures that don’t “speak” the truth about the property will disappoint tenants. There are pictures that say “WOW!!!” but when to visit the property is the exact opposite. Make sure the pictures comunitate the full essence of the property in a truthful way.
Be organized -- Don’t be a hot mess. Keep your documents in one place. Keep track of routine maintenance. Don’t let a property deteriorate. This is crucial for finding a quality tenant: a good, clean, organized landlord.