As multifamily real estate advisors in Los Angeles, it’s a scenario we see fairly often: A parent or spouse who managed the family’s apartment building for decades passes away, and the property goes to a wife, son, or daughter who wasn’t as close to the day-to-day. Suddenly they’re responsible for tenants, leases, insurance, and a loan, without a clear sense of where to start.
If you’ve found this article, you could be in a similar situation right now.
The good news is that you don’t need to decide what you want to do with the building right away. That said, certain actions are necessary in the short term to ensure your interests are protected as you explore your options.
In this blog post, we’ll cover the first steps you should take as an heir to a Los Angeles rental property.
Note: This blog post is not intended to offer formal insurance, legal, or tax advice. Always consult the right professionals before making any decisions.
Need a recommendation? We can connect you with brokers, CPAs, and lawyers who understand the nuances of commercial real estate. Get in touch with us.
Day One: Insurance
Start by pulling the building’s insurance policy and going over it in detail. No matter what condition the property is in, things can happen. You’ll want to know what’s covered by the existing policy and if any gaps need to be closed.
For example, look into replacement cost coverage. Will it be enough to rebuild? Confirm if the property has loss-of-income (loss-of-rents) coverage. This is especially important in light of the recent LA fires.
Understand your mold and habitability coverage limits. Exclusions could limit your protections in the event of tenant action. Does the policy cover injury or incident claims from on-site property managers or maintenance providers?
These are just a few details to be mindful of when reviewing the building policy with your attorney or insurance broker.
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Look at the Loan
Once you’ve gone over insurance, it’s time to evaluate the loan.
First, find out the loan balance. You’ll also want to know the rate, when it adjusts or matures, and if there’s a trigger point.
Next, find out how flexible the terms are. Are there prepayment penalties? Do you have the ability to refinance the loan if you want to? Could you sell the property without penalty?
These variables are all important when it comes to finding the right path forward.
Check the Property Taxes
Under California’s Prop 19, an inherited rental property is generally reassessed at current market value, which can mean a significantly higher tax bill than the previous owner paid. Talk with your CPA or attorney early so you know what to expect, and make sure any required change-in-ownership filings are submitted with the county.
You’ll also want to check whether the building has any overdue property taxes. Sometimes these must be paid right away, but not everyone has the cash on hand to cure a delinquency. In instances like these, you have a few options.
Small Bridge Loan: If you plan to refinance or sell in the future, a short-term loan can provide you with the cash you need to cover tax payments now.
Borrow Against Another Property: Have other real estate assets? You can pull cash from another property to cover your tax bill.
Refinancing: If the property’s debt service coverage ratio (DSCR) has enough of a cushion, you can apply for a new loan. Ideally, you’ll be able to do this with no prepayment penalty.
Sell: If you have your heart set on selling the building or the numbers make it the most practical choice, it could be the right way to go. Once the property has sold, you can use the proceeds to pay off the owed taxes.
Don’t forget to double-check the loan terms before deciding which path you’d like to take. Certain clauses or penalties can change the numbers and impact what’s possible or practical.
Order a Preliminary Title Report
Get a prelim and review it with your attorney. Confirm the current name on title and check for any encumbrances, liens, easements, old notes, and judgments recorded against the building. Verifying these details early on can avoid unpleasant surprises down the road.
Walk Every Unit
After going over the building’s insurance, loan, taxes, and title on paper, make an in-person visit.
Walk the property front to back, including every unit, vacant or occupied. This is your opportunity to get a feel for the building and meet the tenants who live there. Importantly, this process also helps you spot potential problems and deferred maintenance before an inspector or potential buyer does.
Make a detailed note of any issues you find. This will be important later.
Considering a multifamily property sale? Uncover more portfolio-optimizing advice with these related blog posts.
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Get Your Hands on the Books
Once you’ve toured the building, take a look at the accounting. You won’t be able to make important calculations like cash-on-cash or prepare for a sale without first getting your books in order.
Start by tracking down each tenant’s lease (this can be easier said than done). A tenant’s recollection of their rent doesn’t always match what’s on paper, so having the actual documents protects you from disputes down the road.
Take a look at the collections report from the past six to twelve months. Make note of which tenants pay their rent on time and who is overdue.
To prevent any headaches or misunderstandings, you can also have tenants sign an estoppel certificate, locking in what they owe and what they’ll pay.
Find the Upside
Even if it’s not your priority right now, it’s helpful to think about the long term.
Start looking for strategic ways to increase your building’s returns or eventual sale price. This could include cutting down on costs, making small repairs or upgrades, rent or tenant optimizations, and more.
Like every step on this list, always consult a professional (or professionals) before actioning any changes, especially anything related to rents and tenants.
We specialize in amplifying your property’s market value. Learn more about our approach to asset optimization.
Hire a Property Manager
Managing an apartment building can be a hands-on job, and not everyone has the desire or time to do it.
If you don’t have the capacity to manage your newly inherited property, consider hiring a professional.
Los Angeles is home to a number of reputable asset managers and established management companies, many of whom belong to our professional network. We’re happy to connect you with seasoned professionals who are best suited to your building.
Inherited an Apartment Building in Los Angeles?
If you’ve recently inherited a building and need support, our team is here for you.
We understand the unique needs of heirs and their families. Whether you’re leaning toward keeping the property or selling it, we can help you make sense of your options and determine the right path forward.
Get in touch with the Neema Group today for a confidential conversation about your property.
Need multifamily real estate support? Call (213) 797-2290 or email us at neema@marcusmillichap.com to reach our team of experts.
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