Renting versus selling an inherited home

But when a client is bequeathed a property following the death of a family member, it can seem like the perfect opportunity to dip a toe into the rental market and earn an additional income to boot.

Then again, selling a property they did not have to buy in the first place and being able to pocket a possibly quite substantial lump sum to do whatever they want with can be extremely tempting.

Those who inherit a property will have to weigh up the pros and cons of each before deciding whether to rent or sell – it can be a difficult and time-consuming decision to make.

Paresh Raja, chief executive of Market Financial Solutions, notes: “Faced with the prospect of owning a property that they would not choose to live in, Market Financial Solutions’ research found that over half, or 55 per cent, of people due to inherit a property will be looking to sell it as soon as possible so they can re-invest the money in a different asset or property of their choosing. 

“However, nearly a third, 32 per cent, are looking to take advantage of the long-term returns on offer by undertaking some form of refurbishment so that the house is in a better condition to sell or place on the rental market.”

Personal or profit?

Sam Mitchell, chief executive at online estate agents Housesimple.com, stresses: “Making a decision whether to rent or sell isn't just about profit margins; it’s also about your own personal circumstances. 

"If you don't live near the inherited property, then you need to think about how you're going to manage the property and whether you want that responsibility.”

He suggests: "From a numbers' perspective, if you've inherited a property that is mortgage free and the local rental values are strong, then you could enjoy a very nice monthly income from the property.

"You may find that to earn a similar income from a pension would require a pension pot running into hundreds of thousands of pounds. If you're already in your 40s or 50s, that may not be achievable in such a short space of time.” 

Letting out property is becoming an increasingly professionalised job, and can make large demands on both a landlord’s time and finances.Simon Heawood

If it is the rental route that your client wishes to go down, then it may be wise to run through a checklist with them, to make sure they are prepared for the additional responsibilities renting out a house brings with it.

This is especially important if this is the first property they will have rented.

If the client already has a portfolio of rental properties, then they will be familiar with what will be expected of them as a landlord.

Alan Collett, fund manager at Hearthstone Investment, says those who inherit a property that they plan to rent out need to ask themselves the following questions:

• What is the energy performance rating? There is now a requirement for any properties rented out in the private rented sector to normally have a minimum energy performance rating of E on an Energy Performance Certificate (EPC). Almost all modern homes will exceed this standard, but many older ones will not.
• Is the property in good enough condition to attract a good tenant and will future maintenance bills be reasonable? Even though the house has been inherited it may be worthwhile having a full building survey before you commit to keeping it and letting it.
• Is it in an area that will have a good supply of potential tenants? If not, you may have long periods when the property is empty, which could be a problem from a security and insurance perspective.
• Is the area one which is likely to benefit from at least average house price growth? If not, you may miss out if and when you decide to sell.
• If you had not inherited it, would you have bought it as an investment? If not, keeping it may be the wrong idea.

He cautions: “You should also consider that owning only one rental property can be a volatile investment.

“A poor tenant, although fairly rare, can leave you with many months of unpaid rent and damage to the property when they go. To a significant extent these risks can be covered by insurance, but the cost of this needs to be included in your calculations.” 

Mr Collett also points out that with a single property, there is a greater risk of it being blighted by nearby development or infrastructure schemes, or even from the road or area becoming less desirable because of other people who move in or away.

Recent changes to stamp duty and tax relief have made it more challenging for those landlords who own just one or two properties, as opposed to those with a large portfolio of houses to let out.

Arla Propertymark, the regulatory body for letting agents, reports in April letting agents saw the highest number of landlords selling their buy-to-let properties since its records began in 2015.

“Letting out property is becoming an increasingly professionalised job, and can make large demands on both a landlord’s time and finances,” admits Simon Heawood, chief executive of Bricklane. 

“For those landlords unsure whether to keep the property and rent it out or to sell it, it’s important to be realistic about the long-term rental potential of the property. 

“This will include what costs are involved, and whether the capital tied up could be better used elsewhere.”

Brexit has had an impact on the property market with the likelihood of fewer transactions as we close in on the leave date, uncertainty bites and people become more risk adverse.Sam Mitchell

It is possible that the property being inherited is already a rental home, in which case, Mr Heawood says, “this will constrain your options in the very short term, but once the tenant contract comes up for renewal in the future you will have the option to sell, while still being generous to existing tenants on their notice period”.

He observes that for the amateur investor, direct, individual investment in property is making less and less sense.

“The National Landlords Association recently announced that one in five landlords plan to sell up in the coming year, many citing tenant demands, as well as changes to the tax treatment of landlords, as their reasons,” he explains.

“The unglamorous reality of being at the end of a phone when the boiler needs fixing doesn’t suit most people’s lifestyles, not to mention the tax penalties and concentration risk of having so much capital tied up in one asset.”

That leaves selling an inherited property, although this comes with its own complexities and set of decisions to make.

Many people will have seen the headlines about property prices being affected by the UK’s vote to leave the EU.

The Nationwide House Price Index shows annual house price growth slowed to 2.4 per cent in May.

In addition, if the property inherited by the client is in poor condition, they will have to decide whether to make the necessary alterations in order to put it on the market at a higher price, or sell the property in its current state for less money but also possibly less hassle.

Mr Mitchell suggests: “If the property you've inherited requires a considerable amount of work to bring it up to a rentable standard, and you don't have the time to carry out that work, then it might make sense to sell.”

The Brexit effect

Should potential sellers be wary of the Brexit effect on the housing market?

Prices are still holding up in many areas, observes Mr Mitchell. “But maybe with the uncertainty of Brexit around the corner, selling could be the prudent route to take,” he notes.

"Brexit has had an impact on the property market with the likelihood of fewer transactions as we close in on the leave date, uncertainty bites and people become more risk adverse. 

"This uncertainty is likely to last for a while, and will probably disproportionately affect the London market."

Mr Heawood concedes that while sales markets are slow at the moment, a good agent can help those who decide to sell.

“A little effort on dressing the property can support a faster sale, particularly as you are chain-free. That said, unless you have a burning need for the cash, you should try to be patient in order to receive the right price,” he reasons.

Mr Raja confirms: “While there have been some concerns over the current performance of the UK property market in terms of house price growth, its resilience as an asset class during this current time of political uncertainty cannot be understated. 

“Demand for property is currently outweighing supply, and while the rate of house price growth may be slowing, the returns on offer are still much higher than many other traditional assets.”

But he emphasises the decision to rent or sell an inherited property should be informed by a number of important factors. 

“For instance, it is important to consider where the property is located and what is the likelihood of it remaining or becoming a popular destination for people to live,” he says. 

“What’s more, those who rent the property must remember that the income they receive from this will be taxed.”

eleanor.duncan@ft.com