Inherited property, what to do??

Question

Hello,

I just inherited a condo in Clearwater, FL. It’s a 1 bedroom, 2 bathroom officially. It’s really a 2/2 but the second room does not have a door or window so it doesn’t qualify as a room. I estimate it’s value to be around $320,000. I own it free and clear. Over the past few days I have been non stop thinking about what I should do with it. Cash out refi? Collect the rent($1750 gross at the moment, 1000 net) and save up for a down payment on another property and go from there? Sell it and buy smaller properties with less tax and HOA.

I need advice from professionals. I feel like collecting 1000 a month from a 300,000 dollar property is wasted potential at the moment when people who started with much less own 20+ doors now.

Bill B. · Answer

@Charles Trimmer

Charles, your post is titled inherited property. If you inherited it your basis is 100%, ther will be no taxes.

If it was “gifted to you” then you inherit the gifter’s tax basis, not zero but probably still low. (I don’t know what happens with gifted property’s depreciation recapture, ask an expert.)  If this is the case I’d probably hold for 10 months and then list it with closing to occur after a year’s ownership and sell it empty. You’ll get more for an empty property and pay long term capital gains rate. But if you don’t live in Florida you’re state will probably have their hand out for income tax as well. You could probably do a 1031 exchange if you could show the IRS this property didn’t match your investment theory even with a short personal hold time, talk to a 1031 expert like @Dave Foster.

Dan Maciejewski · Answer

For the people that mentioned it -- no STR in Clearwater!

In my mind it's not 1750 off of 300k, it's 1750 off of 0.  I like free cash flow!  BUT, the others do have a point in that, if that could be deployed elsewhere and then make more money, it's worth a thought.  Selling and buying do have costs, though.  You're looking at 6-9% cost of sales and another 1-3% cost of purchase, on top of your actual cash costs.  That brings you down to 265k to invest -- you probably know what that gets you locally.

It's not a great idea to trade an asset for a matching asset, especially a known asset for an unknown.  Millions of day traders make hedge funds rich every year doing just that.  The only ones that make out are the middlemen -- and this is coming from someone that makes money when people sell!

You're not going to get much of an STR locally for under 300k, although you can get something decent for 300-350 that should gross +-45k/year.  That is worth looking into.

I love cash flowing, appreciating assets, and when they are very very low cost like you have, more the better.  If it were me, I would hold on to it, and use the cash flow to purchase another.  After 3-5, you may want to cull the bottom performer and trade up.

Bill B. · Answer

The returns aren’t horrible but…

If you had inherited $300k in cash would you have bought this property? If not then it’s time to sell. It’s not worth more because you own it.

Bruce Woodruff · Answer

a) You're not competing with anyone but yourself. Don't compare....

b) $1750 out of a $300k is not horrible. Can you raise that at all?

c) Have you considered doing a STR? Would it work in that area?

Dan Maciejewski · Answer

Great -- That's a good plan!  The 1st few are the slowest, then the snowball can begin to grow a lot faster.

Charles Trimmer · Answer

@Dan Maciejewski Thank you very much. This is what I’m heavily leaning towards. I’m going to collect the cash flow for 3-5 years then use that saved up money to buy a house/condo with an FHA, live in it for a year then rent it out then repeat. It might take a long time to build a robust portfolio but that’s real estate.

Charles Trimmer · Answer

@Bill Brandt thank you for your response. I have thought of this but there’s tax implications to it. It was quitclaimed to me so I would have to pay short term capital gains tax if I sold it instantly. If I hold on to it for a year or more it will be long term capital gains tax so lower tax rate.

Bruce Woodruff · Answer

Really good point!

Charles Trimmer · Answer

@Bruce Woodruff thank you for your response. I will definitely raise the rent in the near future as rents have exploded in this area as of late. I have long term tenants in place that consistently pay me. Once they decide to leave or resign I will increase their rent. Unfortunately, the city of Clearwater has very difficult regulations for short term rentals so that’s not a viable option.

Charles Trimmer · Answer

@Stephan K. Thank you! By cash out do you mean take the cash that the rent generates? Or cash out refinance?

Inherited property, what to do??

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