Sell vs. Rent: Which is a better choice for an inherited house?

When you inherit a home from a deceased relative, it may seem like the ideal chance to test the waters of the rental market and make some extra money. If the local rental prices are robust (like that of Houston) and you’ve inherited a mortgage-free house, you stand to make a tidy monthly profit from the property.

The average monthly rent for a single-family home in Houston is $1,742. Houston’s rents have gone up 9.8% in the last year. A 3-bedroom apartment in Houston has risen in rent by around 11% in the previous three years. 

On the other hand, selling a home you did not have to purchase in the first place and pocketing a potentially considerable lump sum to do with as you please may be equally appealing.

Still grappling with the idea: should I sell or rent my house? While profit margins are noteworthy, so are the specifics of your unique situation. You might not want to be saddled with the burden of managing someone else’s estate while living far away. If the home requires expensive repairs or is out of state, selling may be the wisest action. However, if you have emotional ties to the property and the mortgage payments are paid off, living there or renting it out for a while may be worthwhile. 

It may be challenging and time-consuming to decide whether to rent or sell your inherited property. When emotions run high and you need to make an informed decision soon, let our guide help you weigh the pros and cons: is it better to sell or rent an inherited house?

Renting The Property

The one percent rule is a solid starting point when assessing an inherited property as a rental property. A rental property must generate at least one percent of its purchase price in monthly rental revenue to meet the one percent rule. As the property’s fair market value climbs beyond $500,000, this rule no longer applies. 

If the property doesn’t meet the one percent rule, it probably isn’t producing a realistic rental income each month after considering all costs, repairs, vacancies, and general upkeep. When doing the math on a rental property, you shouldn’t factor in appreciation, which is why the one percent rule is essential to remember.

Costs of repairs, property taxes, insurance, and property management must add up to between 25 percent and 50 percent of the rental revenue. You may adjust this percentage according to the state of the home, how much work is required to keep it in good shape, as well as your neighborhood. 

Inheriting rental property could be excellent if you still expect a positive cash flow despite these conditions.

Pros Of Renting

  • Putting yourself in a position to make additional income on a long-term basis certainly has its attraction. You may cut down on the number of hours you put in at work or perhaps retire earlier. Renting out one’s property might result in a steady income over the long run.
  • You stand to gain if the value of your current home rises in the future. The real estate market may not be advantageous to you when you inherit the property, such as in a buyer’s market. While you wait for the housing market to improve and the property’s value to rise, you might rent it out and make money. 
  • Multiple family members might live well on the rental money. Unless you plan to sell your house and then divide the proceeds of the house sale, it’s simpler to split the monthly income than to break an inheritance.
  • You are exempt from inheritance tax. This is only true if the value of inherited property is more than the tax-free threshold. A rented property, on the other hand, may be subject to additional taxes. 
  • You avoid selling. Selling a property may be time-consuming and frustrating without a real estate investing company that buys houses as-is.
  • You may be eligible to receive a tax break. Tax deductions for legal expenses, maintenance, and depreciation are all examples of this. Government websites are helpful for information on this topic. 

Cons Of Renting

  • The management of the property is going to fall on your shoulders. You will be at the whim of your renters unless you pay for professional property management to take on the duty, which would reduce your monthly revenue. In case of a break-in or other incident on the property, you must act immediately to restore order. And there’s no telling when the pleas for assistance might come in!
  • Prior to renting, you may need to spend money if the property is in need of renovations, repairs, or upgrading. You’ll have a better chance of finding quality renters and maximizing your revenue if you have a good rental property.
  • You have to navigate a lot of bureaucracy. You will be held accountable for many duties as a landlord. Some examples of these responsibilities include supplying smoke alarms, ensuring that the wiring and electrical systems in the rental property are safe, and arranging for yearly gas safety assessments.
  • Renters that aren’t trustworthy are a potential danger to your property. There’s no way to tell whether a potential renter will take care of the investment property and its furnishings, pay on time, or otherwise make life easier for you until they move in. Tenants that are difficult to deal with may be a real pain in the neck, and legally evicting them can be much more complicated.

How To Know When Renting The Property Is Best

The cost of property management and upkeep will probably rise if you are a remote landlord since you will need to include the actual cost of the property manager when calculating the rental property’s fees. 

As tenants cannot use the inherited property until it is in a rentable state, costly major repairs must also be considered by the owner, especially if there’s substantial deferred maintenance on the property.

However, you should anticipate a lower vacancy rate and higher rent if your inherited home is close to a popular tourist attraction or a large city. Instead of only finding long-term renters to live in the house, inheriting a property in an area with strong demand opens up the possibility of effectively promoting on vacation rental platforms like Airbnb.

The emotional connection to the residence, mainly if it’s a family home, is the last factor to take into account when renting a property. Renting will let you retain the house while earning money. One word of caution, though. You may have to buy out a sibling you share the inheritance with if they’re not interested in going into the rental business with you. 

Selling The Inherited Home

If you’re presently on a low salary or trying to pay off debt and wondering – should I sell my inherited house? – selling your inherited home might provide a much-needed financial boost. The money from the sale can also enable you to fulfill a long-held desire, like doing a world tour or starting your own company.

Housing market trends show an increase in property prices. Costs are expected to climb even more in 2022. As a result, selling a home in Houston right now is a smart move. 

Pros Of Selling

  • It costs money to let a house sit empty. Even an inherited home can still be expensive. Utilities, repairs, property taxes, insurance, and normal wear and tear may put a big dent in your budget. If no one lives in the house, it will slowly fall apart over time, which could cause its value to drop by a lot. 
  • Before renting the home, it’s a good idea to ponder things. Being a landlord is a business, not a pastime, and getting started may be expensive and time demanding. If you want to own a rental property for the long term, you need to think about the drawbacks.
  • The majority of inherited homes are in a state of decay. It’s common for inherited properties to be in disrepair since the previous owners were either old, sick, or otherwise incapable of maintaining them. Before moving in or renting the property, the beneficiaries will be responsible for any required repairs. Little repairs will still add up even when things go well and you have a reliable contractor.
  • Time-consuming and costly, probate is not for the faint of heart. Probate is the legal procedure used to distribute a deceased person’s assets after death. Probate is a time-consuming and costly legal process for settling a departed person’s estate. It may be hard for families to cope with the death of a loved one while meeting with attorneys, accountants, funeral services, and more while dealing with legal and financial issues.
  • Even if the house has gone up in value since the person who left it to you bought it, you won’t have to pay capital gains tax if you sell it quickly after inheriting it. At the time of the previous owner’s death, the property’s tax basis is raised to its current market value. That means you get the house at its value on the day the person dies. When you sell the home, you only pay tax on the increase in value that happened while you owned it.

Cons Of Selling

Most homes will appreciate over time. An immediate sale may result in a lower price than a later sale some years down the road. Sellers might also face months of waiting to find a buyer if they put their property up for sale on the market. 

How To Know If Selling The Home Is Best

Sell your home to rid yourself of all of these headaches. You may be unable to sell or rent the inherited home because you lack the cash, the time, or even the inclination to make the necessary repairs. Rather than taking on the burden of maintaining the property, maybe you would like to get a quick cash offer.

Moving Into The Inherited Property

The home you inherited may have a special place in your heart, and as a result, you don’t want to part with it. If the inherited property does not make a profitable rental investment, you might want to run the same research on your present house to see whether or not it is more likely to bring in a healthy rental income for you.

If this is the case, you may put it up for rent and move into your inherited residence. Be careful to verify the terms of your mortgage, if you have one, to see whether you can do this.

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