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Inheriting Real Estate: Tips for Success

Updated: Jan 29

If you inherit real estate assets, then you have decisions to make on a path forward. Today we offer tips and guidance for those needing direction on how to ensure success and mitigate risk. 


Person signing documents

by Trevor Calton


First, Assess Your Goals

Real estate can be an excellent investment, but only if it aligns with your goals. Contrary to popular belief, you CAN lose money in real estate if you are not careful. So the first step is to ask yourself these questions:


  • If you were going to invest in real estate without inheriting it, what type of property would you buy? 

  • How does that compare to the property you are inheriting?


Real estate builds wealth in 4 distinct ways (I also have a video on this) so it’s important to understand how each wealth-building engine aligns with your goals:


  1. Cash flow

  2. Appreciation 

  3. Principal Reduction (on debt) 

  4. Tax Benefits


Also, every real estate asset is unique, and each one operates and builds wealth for the owner in different ways. For example:


  • a property valued at the top of the market may not appreciate much, but it may provide excellent cash flow.

  • a property with below-market rents may not cash flow very well, but it may create a great opportunity for appreciation.

  • properties with mortgage loans may offer better tax advantages than one which is owned free-clear.


Work with your advisors and look at the historical financials.

Your accountant should be able to help you. Also, recognize that the financials will change going forward. The property taxes may increase and loans may be coming due soon. If so, interest rates may be higher when you refinance. The property may also have deferred maintenance that will need to be addressed.


Be sure there is enough money in capital reserves to address the property’s physical needs. Preservation of the asset is paramount in real estate. Not properly maintaining the asset could trigger a technical default if the property has a mortgage on it. Be sure to understand what the property will need in the future.


Determine if you have the time, energy, and resources to own the property

Each property is also unique in its management requirements. Properties that were self-managed by the previous owner may take a lot of time & effort. Larger assets, with professional management in place, may not take as much of your time.


Regardless, owning real estate will still require some work. Even if it’s professionally managed , someone still must act as the asset manager. The asset manager oversees the property management and the real estate business. They also handle the financing, deal with any legal issues or insurance claims, and the sale of the property when that time comes. Most often, the owner of the property is the asset manager.


Understand that different property types have different responsibilities

Determine what your property will require from you. Most people can step right in to owning a rental house, and figure things out as they go. But an apartment complex might be overwhelming with turnover, maintenance, tenant issues, etc.


Commercial properties, such as shopping centers or office properties, can be very challenging to own. They are much more complex than residential assets. Operations, maintenance, and lease negotiations usually require a trained professional.


They can also be capital intensive. Tenant improvements can easily cost as much as $50-100 per square foot, or more, depending on the type of property and where it’s located. For example, if the tenant improvements on a small, 2000 square-foot space cost $50 per square foot, then it would cost $100,000 for that space alone. 


Determine your future capital needs

Does the property have capital reserves set aside for major systems. Ex: new roof, siding, etc. Be sure you have the capital reserves to own and properly manage the type of property you are inheriting.


Consult with key experts…

If you’re not sure how your inherited real estate will create wealth for you, then talk to your advisors.


Attorney/estate planner - If an estate plan was involved, speak to whomever helped draft it. You want to understand if there are any restrictions or limitations on what you can do with the property.


Accountant - Both keeping and selling the property can have tax consequences. Be sure you understand them. Understand how the asset has a step up in basis and whether any estate taxes will be owed, as well as how much the property taxes will be moving forward.


… But BEWARE of conflicts of interest

Determine your strategy based on your goals. Be wary of advice from people who stand to benefit from one particular strategy. It’s difficult for them to be objective. 


Real Estate Agent - A good real estate agent/broker can give you a “Broker Opinion of Value”, typically free of charge. They do this in the hopes of getting the listing, if you decide to sell. But remember, a real estate broker is motivated to get you to sell. So keep that in mind, and don’t let the broker determine your strategy.


Financial Advisors - Also be wary of your “Financial Advisor” which is just a fancy name for “bank salesperson”. They rarely know more than you do, and they will almost always encourage you to sell the property and move the money into assets that they manage. They do this because they take a slice of of your portfolio each year (often as much as 3%), regardless of how well they perform.


If you say you want to keep your money in real estate, many Financial Advisors will suggest moving your money into REIT stocks. But again, this may or may not be the best strategy for you, depending on your goals. 


Always speak to your accountant and attorney and make a decision on your strategy before you deal with a Real Estate Broker or a Financial Advisor.


Next, determine how much the property is worth

Even if an appraisal was conducted as part of the valuation of the estate, you should still get a broker’s opinion of its current market value. Appraisals often undervalue the real estate, especially if they are more than 90 days old.


Explain to the real estate broker that you need to know the value of the property in order to make your final decision as to whether or not you will sell. Good brokers do this all the time. 


Decide whether to sell or hold, then make a plan

You will have decisions to make, either way. If owning real estate doesn’t align with your investment goals, then consider selling it and investing in something else. If the property aligns with your goals, consider holding on to it after you make a few other decisions.


If you decide to sell…

You’ll likely want to put the money into something else. Talk to your accountant to determine what you will do with the money? How will you reinvest it? What will the tax consequences be? 

If your accountant doesn’t specialize in real estate, consider hiring one that does. It will pay for itself in the long run.


If you decide to keep the property…

Determine the property’s management needs and decide:


  1. Who will be the property manager? The property manager handles the day-to-day operations. This includes leasing, maintenance, collecting rents, paying bills, etc. 

  2. Who will be the asset manager? The asset manager handles the business. This includes overseeing the property manager, managing the mortgage loan(s) (such as when the loan needs refinancing), preparing financial statements & tax documents, and selling the property.

  3. Get Educated - Check out the Real Estate Investment Masterclass at Real Estate Finance Academy


FAQ - Frequently Asked Questions 


“Do I need to notify the current residents if we inherit real estate and plan on selling it?”

No, it’s not necessary to inform tenants the building is up for sale. This is an example of the difference between asset management and property management. The tenants deal with the property manager. They should never be impacted if the building transfers ownership. Good investment brokers can market the property without making the tenants aware of any potential sale.


“How do I know if the property is undercharging/overcharging on rent?”

If a real estate broker gives you their opinion of value, ask for a “rent survey” or “rent comps”. These show how the current rents compare to rents at similar properties in the market. 

If the property was owner-managed (as opposed to managed by a 3rd party) then the rents might be below market. Many owner-managers try to avoid frequent turnover by keeping rents low. In this case, there may be an opportunity to increase cash flow and boost the value of the property.


“What experts should you consult with about keeping the property and managing it?”

If you want to manage the property yourself, but have never managed real estate before, don’t. I strongly suggest that you hire a professional manager for at least 90 days and shadow them. This will give you the opportunity to learn and avoid costly mistakes. Don’t try to learn as you go. Things can go south very quickly. Tenants can tell when a manager doesn’t know what they are doing and will often take advantage of the new manager’s inexperience.


“Can I sell and do a 1031 exchange?”

Yes. Although depending on your basis, it may not be necessary to execute a 1031 exchange. Talk to your accountant to determine the best path in your particular situation.


“I want to own real estate, but I don’t want to manage it. What are my options?”

For most properties it’s possible to find a professional property manager to oversee the day-to-day operations. They manage tenants, collect rents, pay bills, coordinate maintenance, provide monthly reporting, and more. Property managers will typically charge a percentage of the income as a fee, plus any salaries for people on staff. It’s very important to hire a reputable, competent property manager who has experience and also manages other properties.

 

Trevor T. Calton is and President of Evergreen Capital Advisors and the founder of Real Estate Finance Academy. Since 1997, he has analyzed, acquired, or sold more than $5 billion of commercial real estate assets, financed over 500 commercial investment properties, and overseen the asset management of over 6000 units of multifamily housing.

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