I have inherited rental apartments — now what do I do?
My grandparents left me three buildings in a trust when they passed. I was thirty years old at the time and had barely paid attention to all the things they told me about real estate. They kept talking about building net worth and dragged me out to empty apartments to clean and paint them between tenants.
My job was to sweep clean, empty the trash, and reach the areas of the walls where kids crayoned on. I wanted to keep my grandparents company, and dreamed of the pastrami on rye, which was part of lunch after we got all the work done. My grandparents were very focused, and as their real estate investments grew, they decided to buy more real estate. The great benefit of that was that the cash flow of those investments helped send me through college.
As they got older it was clear that they didn't have the energy to do all the cleaning and painting, so they hired sub-contractors to do it for them. At some point, I graduated from college, lost interest, and joined a band that traveled all over the United States.
One day my cell phone rang, and my father told me that my grandparents had been in a bad accident. I immediately went to visit with them, and they asked me to manage their real estate investments. They sent me all of the financial reports to make sure I was aware of the properties and asked me to make sure that the tenants were paying rent. I did that as a favor for them, not realizing that it was a learning moment.
10 years later
Here we are, 10 years later, and I've inherited some of their investments. I really don't like talking to tenants, or to contractors who are supposed to make repairs. I'd rather be in my studio making music, but something inside me resonates with “net worth.” Then, I remembered that my band is not making any money, and I need to find a way to support myself. I considered selling the properties but realized that the monthly cash flow was keeping me afloat. So, I decided to pay more attention, and I went to the local community college to learn more about real estate investing.
Once I realized that these investments were paid off and there was no debt, I learned that I could refinance them and use the cash tax-free to buy more real estate. Interest rates were low at that time — in the 3% range — so I refinanced two of the properties using that cash to buy an additional property.
I had to learn how to read financial statements. I really didn't get what balance sheets, profit and loss statements, rent rolls aged payables and trailing 12-month statements were all about, but I learned. I was fortunate to have a property management company help me, and they provided the financial reports that I needed. I probably would never have had the personal discipline to track the rents in separate accounts and deal with the tenants, but the property managers did.
I started keeping track of my net worth and realized that, over a period of five years, the value of real estate had increased significantly and that my net worth had increased as well. As a result, my personal monthly cash flow had increased. That became a motivator to buy more real estate and do more of the same.
Capital expenses
It was at that point when the phone call came from the property manager who said the front deck was rotten on one of the properties and it needed to be replaced. I had burned through all the cash the properties generated up to that point, and that wakeup call made me realize that I needed to establish reserves to pay for major capital expenses. It is why the government has an allowance for depreciation that allows you to discount over a period for your real estate investments.
I went to the bank, borrowed some money on a credit line to repair the deck, and repaid that over the next 12 months. Then, on a monthly basis, I started setting aside 5% of my cash flow for property-related repairs.
Maturing into a long-term real estate investor
I compared notes with my mom and dad, who also inherited some real estate from my grandparents, and we decided to track our results on an annual basis. We also decided to join the local landlord association to keep an eye on all the changing laws, to be better prepared to deal with our investments. Sure, we were small-time investors, but I was beginning to realize that, at some point, I would also inherit my parents’ assets. I'd better start paying attention.
I expanded my knowledge by learning about construction basics, more finance information, and about management agreements and contracts. Another five years passed, and I had built up a nice nest egg. Did I mention that I opened a music store and purchased some solid commercial building investments as well? My real estate assets and my net worth were beginning to grow. I got married, we had a couple kids, and I realized that I needed to start thinking about how to pay for college and retirement. I was happy that my grandparents had left me some investments to help fund all these things I wanted to do. As time went on, I actively purchased more investments by refinancing the existing properties, and I was able to aggressively build a strong real estate portfolio.
Summary
Yes, I had to pay attention to the investments on a monthly basis, I had to meet with the property managers regularly to inspect the properties, and I had to do some planning, but candidly, that was a small price to pay to put our retirement in place.
Now, as I look back, I remember much better what my grandparents were trying to do for me as they made me work with them cleaning and painting empty apartments. As I head into my 70s, I realize that I really don't want to mess with these properties any more, so I started training my children and feeding them the basic information that I learned (including the pastrami sandwiches). I hope that they are more interested than I was at their age and that they will learn to take care of the investments for their children and their children's children.
Looking back, I wouldn't have done it any other way than investing in real estate. Over a period of time, I sold my older buildings to buy newer ones. I wanted newer stock that would be closer to the current code and maybe hold up better if there was a fire, an earthquake or other weather-related challenge. As you make that decision to keep or sell the real estate that you've inherited from your family or someone else, understand that the cash flow investments generate can create a huge amount of freedom. If you sell, you have capital gains taxes to pay, and once the money is put into the new house, or the new pool, there is no cash flow to help you with your other bills. I, for one, just kept my real estate investments.
P.S.
When you inherit real estate, you have many options in addition to the hold option discussed above:
Sell — this depends on the current economic environment.
Refinance.
Donate all or part to a charity/charities.
Donate to a donor-advised fund and have them sell the assets for you. You get a good write off against other assets and can direct the proceeds to charitable organizations of your choice.
Don’t hesitate to reach out to us for a previous article with important questions to ask as you screen a property manager.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
