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Inherit a House? How to Rent it Out – By Cliff Hockley

Posted on 01. Mar, 2016 by in all

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We manage properties for homeowners with many unique circumstances but inheritance is one of the most common reasons why people choose to rent out a home.  This is the story of a typical case.

The Inheritance

Jayne was in her late 40’s when her grandmother died.  When Jayne met with the attorney to review the estate issues he gave Jayne the keys to the house her grandmother had lived in for forty years and a copy of the property deed. This was something she had never expected.  She had decided early in her career not to invest in real estate.  

She wanted nothing to do with the property taxes and maintenance headaches, and now she had this old house to contend with.

She asked the attorney what others have done with houses they inherited.

The attorney frankly told her that she could sell it, rent it or donate it to a charity, but he advised Jayne not to make any decisions until she walked through it first.  “It was not a bad investment,” he said, “It’s insured, owned free and clear, property taxes are current and it’s well maintained, you can’t ask for much more than that.” 

The Decision

Her grandmother had lived in an older one level brick house. It was 1,800 square feet with three bedrooms and two bathrooms, a two car garage and a small yard.  She had already begun feeling sentimental about it during the estate sale when a young man approached her with a business card.  He introduced himself as the neighborhood realtor and gave his condolences about her grandmother’s passing before swiftly changing the subject to ask her if she had put the house on the market yet.

Jayne was taken aback.  This guy was rude and pushy and she wanted to get rid of him.  Purely, in reaction to his offensive demeanor, Jayne told him with confidence that she had already decided to keep it as a rental.  That was how she made her decision.

But she knew nothing about being a landlord.  She decided to start by consulting the attorney to first understand the laws involved. He sensed she might be in over her head during the conversation, “You may want to hire a property manager to help you,” he suggested.

Jayne, a successful businesswoman, saw no reason why she couldn’t handle it herself.  

Renting the House

Once Jane made up her mind, she toured other house rentals in the area in person and on the internet to get a sense for market rents and conditions. Based on her research, she decided to upgrade the house with more modern colors and appliances.  Since the carpets were in good condition she just had those cleaned.  She also received a referral from a friend for a good handyman to make some minor repairs.

Once the place was up to par, Jayne placed an ad online and within five minutes started receiving calls about the house.  A few roommates wanted to see the house that night.  She didn’t even have any application forms!!  She quickly printed out a form she found online but when they came she wished she didn’t have any to give them.  They were five college students from the school down the street.  One of them quickly asked her what application screening criteria she used.  Another wanted to see the lease ahead of time.  She hadn’t printed anything other than the forms out yet so she asked if she could e-mail it to them the next day.   They didn’t mind.  They liked the house so much they filled out the forms right there to be the first ones in line. 

Reviewing the applications after they left, Jayne noticed that only two of the students had any real employment history and two never had any jobs at all.  She doubted that these optimistic students could afford the rent for long.  However, she remembered the attorney’s warning about the rules preventing tenant discrimination and called her local landlord association for help.

She had found the application form through the landlord association website and was curious what other resources they could offer.  She found the regional not-for-profit organization had plenty of good information.  In addition to sponsoring monthly educational dinner meetings they had a newsletter providing tips for improving property management, sponsored annual training seminars, and had an extensive mentor and vendor referral program.

From them she got linked to a credit checking company and discovered that the roommates were not qualified to rent the house.  She learned what screening criteria she could legally use and was able to get the correct rental agreements just in time for the next applicant to pass all her screening criteria.  [AOA serves many landlord needs with their low-cost screening services, up-to-date rental forms, a monthly magazine with management tips, new laws and vendors, advisors to answer questions, and a collection agency!  Don’t do it alone. Check it out http://www.aoausa.com/tenant_screening/]

Problems and Solutions

She thought she found the perfect tenants, young, up and coming, and eager to start their family.  Within a year they had their first baby.  They sent Jayne the birth announcement and she was so proud she had offered them their first home.  But after 24 months, she noticed the rent coming later and later and then not at all.  The husband said they had struggled since his wife quit work after having their son.  Jayne sympathized for a while but eventually was forced to hire an attorney to evict them.  They left a filthy home, with some damages, which her handyman charged her $4,000 to fix.  Only later did she realize his limitations included plumbing and he had overcharged her in attempt to fix something he had little experience with.  Just preparing the house for her second tenant turn was so painful that Jayne considered selling it after all. 

Then Jayne realized that she had something in common with her handyman.  She had her strengths and limitations.  She was at the height of her career.  Her employer had just offered her a national account that would come with a boost in pay and lots of travel.  She loved to travel.  She loved hotels.  She loved her little high rise apartment where she didn’t need to worry about plumbing and landscaping.  Wasn’t that the reason why she didn’t want real estate to begin with?

She also loved the gift her grandmother had given her and decided to rethink her approach.   She interviewed a series of property managers and decided that their expertise was worth the cost to take care of her home.  After five years of renting out her grandmother’s home hassle- free she decided to refinance it and bought a fourplex with the equity.  Her property manager also took over management of that property.

Over a period of 20 years she managed to increase her portfolio to 20 units (her goal), and her cash flow to $7,000 a month which combined with her savings, healthy 401K and Social Security benefits was enough for her to retire on and travel for pleasure this time.   

Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company..  He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM).  Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). 

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