Inheriting home with no mortgage: Options to get started in REI?

Question

Hi all,

I used to have a rental property, but sold it about 8 years ago and am now looking to get back into rentals as investments. I'm inheriting my mother's rambler home in Minnesota  (valued at about $250,000) along with my brother. There is no mortgage on my mother's home and my brother has no interest in keeping the property himself.

I'm looking for advice on the best way to break into investing with this property.
I'm wondering if it would more beneficial to buy out his half and rent out the property, or sell it (split the proceeds) and use the cash as down payments to purchase a few other properties? Comparable rentals in the area are going for between $1400 - $1700/mo.

Are there more financial benefits to doing one over the other?

Other options I may be overlooking (e.g.: pertaining to leveraging the equity)?Thanks in advance!

Bjorn Ahlblad · Answer

@Jennifer Olson 250k property generating 1700 per month is a lousy investment. Sell it. Buy a property that generates proper cash flow. Study up on underwriting and cash flow. Then go out and start looking at MF properties if that is what you choose to do.

Matt Higgins · Answer

What a great way to get back into investing.  Buy out your brother pull out 80% tax free at 3.9% for 30 years, get your systems in place or hire a great property manager in the area (cough cough), and then you can decide if you would like to buy more rentals.  So sorry to hear about your loss, but I bet it would please your mother to do something life changing with the money and the property.  Best of luck!  Let me know if we can help in any way!

Greg Scott · Answer

With $125,000 in equity, you can easily get into real estate investing.

You should be careful not to make an emotional decision to keep THIS house because it was your mothers and because you conveniently own it now.

Assuming this property makes a good rental, consider getting a cash-out refi for the maximum possible.   Assuming 70%, you would have $175.  After buying your brother out you have $50K for any repairs and you should enough cash left over for a down payment on a second rent home.

Account Closed · Answer

I'd advise against any kind of partnership with your brother.  Things can go south when you mix business with anybody whether it's a relative or friend. I'm in the middle of probate over my mother's estate and it brings out the worst in people.  So, if you can amicably buy out your brother, or if that's not possible then just sell it out -- whatever it would take to keep your relationship on good terms is most important (assuming you want to preserve a relationship with your brother).

Tim Winter · Answer

There's several other options you could do, that might work better for you. If you'd like to keep this property in your new portfolio, and it's free and clear, you could do two different rent-to-own options.

If your market has buyers that can't qualify (might be most markets these days) then you could sell the property with seller financing or lease option+HELOC to sell sometime in the future (or never...)

With the seller financing, you could take the down payment and buy out your brother's portion, and to make up any difference, if you structure the note properly you can sell a partial of it to make up any difference. This would mean that you take the property out of both of your names, do the cash out you're looking for, and if any money left over you can use for seed money on your next transaction. After the split payment period ends (usually after 60 payments) then you get those payment back and some nice passive residual income. When the buyer refis you out, then you can take that money at that time and reinvest it.

The lease option with a HELOC is an easier option of the two; you take out a HELOC on the free and clear property and fix up the property with proceeds and/or buy out your brother, then when you receive the option money pay back a portion of the HELOC and use part of the monthly payments to pay it down monthly. You can charge above market rent, no maintenance with a nuisance clause up to $X (which would be good if you and/or brother aren't local or don't want to landlord), and then when the tenant buyer does qualify sometime in the future (or moves out you can do it again) you can then buy out your brother if he's still on, pay off the HELOC and use the remaining sale $ for seeding your next purchase.

Bjorn Ahlblad · Answer

@Matt Higgins great thing about our business is we get to set our own dials. 1700 a month gross on 250k just does not interest me one bit; no matter how you slice it and dice it. To each their own.

Matt Higgins · Answer

@Bjorn Ahlblad not sure that I agree that 1700 Rent on 250k investment is a horrible deal on this situation.  She would be in an investment for 50k if she rifi’s, half of which she inherited on an investment that is below the cost to build. I am assuming this property in the suburbs of the Twin cities metro where the cost to build starts at over 300k, inventory is right, and appreciation is happening.  Im a long term believer in the area that if it cash flows on a 30.

Steve Vaughan · Answer

Poor rent to price ratio several states away?  Sell it unless it's nostalgic like a cherished childhood home or something.

Financially and physically (so far away) it makes no sense to keep.

Joe Villeneuve · Answer

Sell it and use the $200k ($250-........), as a DP (20%) on $1.25M worth of property.

Mark Allen Kenny · Answer

I would consider selling the home and using that cash to invest in a 2-4 unit building.

Inheriting home with no mortgage: Options to get started in REI?

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