Inheriting a property is a significant event that brings both opportunities and challenges. Among the array of decisions to be made, one option worth considering is converting the inherited property into a rental. While this strategy presents potential financial benefits and long-term gains, it's imperative to conduct a thorough analysis of the pros and cons. In this discourse, we'll delve into the rationale behind converting your inherited property into a rental, alongside an examination of the associated risks. 

Establishment of Passive Income Streams:

Transforming your inherited property into a rental venture offers the prospect of generating passive income. The rental proceeds from tenants can serve to offset mortgage payments, property taxes, and maintenance expenses, thereby fostering a foundation of financial stability over time.

Safeguarding Family Assets:

Opting to retain ownership and lease the inherited property can serve as a means of safeguarding family wealth for future generations. Rather than opting for immediate liquidation, renting out the property facilitates the preservation of its intrinsic value, potentially allowing for capital appreciation in the long run.

Leveraging Tax Incentives:

Ownership of a rental property unlocks various tax advantages, including deductions for mortgage interest, property taxes, and depreciation. These tax incentives serve to mitigate the overall tax liability, thereby augmenting the allure of converting the inherited property into a rental endeavor.

Utilizing the equity

In a lot of cases, an inherited property will be 100% paid off or the mortgage is very small and the payment is extremely low. Since this is the case the cash flow that the property will produce is great and any expenses that might arise can be covered out of the monthly rent. This also makes it so you are going to take advantage of depreciation and see great appreciation in value. 

Risks Associated with Turning Your Inherited Property into a Rental: 

Navigating Property Management Complexities:

Managing a rental property requires a comprehensive understanding of tenant relations, maintenance protocols, and legal obligations. Inadequate management practices can precipitate tenant disputes, property damage, and financial setbacks, underscoring the importance of proficient property oversight. You might think I will manage the property myself which is an option but you need to ask yourself what is your time worth and do I want to deal with tenant issues on my days off or when I am with my family? If you want to truly have passive income then having a property manager is the way to go. Make sure you talk to a lot of property management companies and you are comfortable with the one you are hiring.

Exposure to Market Volatility:

The rental market is susceptible to fluctuations influenced by supply-demand dynamics, economic shifts, and regulatory changes. Volatility in rental income and property valuations poses inherent risks, requiring prudent risk assessment to safeguard against adverse market conditions. Rents in the Kansas City market have been stable and rising for the last 5 years so it is unlikely that you would see a huge dip but it is a factor to consider. Signing tenants for longer-term leases like 18-24 month terms secures your property for cash flow unless the tenant stops paying which is always a chance when having rentals. 

Mitigating Unforeseen Expenditures:

Owning a rental property entails ongoing expenses, encompassing maintenance, insurance, property management fees, and vacancy costs. Unforeseen expenditures can erode rental income and diminish overall investment returns, necessitating vigilant financial planning and risk mitigation strategies. Taking the proper steps when getting your property ready to be rented can help reduce the likelihood of unexpected expenses. Since you probably have not lived in the house we recommend having an inspection done of the property to highlight any problems you may not see. This is the best way to not be burdened with extremely high Maintenance costs

It can make a lot of sense to make an inherited property into a rental property when evaluating the prospect of converting your inherited property into a rental, a judicious appraisal of the associated advantages and risks is indispensable. While the allure of passive income, asset preservation, and tax incentives is compelling, the complexities of property management, market volatility, and financial contingencies merit careful consideration. By conducting a thorough analysis and seeking professional guidance, you can make an informed decision aligned with your overarching financial objectives and risk tolerance. Kansas City Legacy Properties can help you make your inherited property into a rental and manage it for you so give us a call today at 816-307-7163 to learn more.