I'm inheriting a real estate portfolio worth roughly $6M with my brother. It’s mostly "dead equity," and I’m trying to figure out how best to scale it.
I'd like to make this my full-time focus. I haven't been involved in the business since I was a kid (painting, sweeping driveways, etc.), and I've spent the last 20+ years in tech. I'm planning to reconnect with some people my dad worked with and develop a more intentional strategy.
I've been doing some early research (and yes, asking ChatGPT), but I wanted to get real-world perspectives here. The assets are in California, and I keep reading that moving capital into higher cap-rate / higher-growth markets may make sense.
I know this is a broad question and I’m still learning, curious what others would do in this situation, or what mistakes to avoid.
Best Way to Think About Scaling an Inherited Real Estate Portfolio?
byu/Apprehensive_Rub3897 inrealestateinvesting
Posted by Apprehensive_Rub3897
9 Comments
1) is there any value add potential? Are they rentals and if so single or multi-family. Are the rents maximized?
2) If no value add then consider selling and 1031 exchange.
3) California has low property taxes due to sb9. did they get reset once they were transferred to you? If so consider selling. If you have low property taxes then you should not sell because maybe because it’s impossible to get another property in the state with that low of a tax basis.
4) If in LA, SF are strongly consider selling due to very very harsh landlord laws. renting in those cities means you need to know what you are doing.
Theres more but in general that is my thought process.
5) You can technically take out a loan against properties instead of selling to buy more things.
You need to improve your skillset first.
Think about it this way. Real estate can be very passive (REITs, being an LP) or very active (being a GP, developer etc), or somewhere in between (having a few units and a property manager or self managing).
Having “money” or “equity” doesn’t make someone skilled: inheritance, or could be a genius startup developer who then bought apartment buildings.
Screwing up is expensive. Don’t screw up.
First you do nothing for a few months but read, read, read.
What does scaling mean?
$6M of paid off RE in CA should be $300K of NOI a year. You can easily keep growing portfolio without doing dumb shit or over-leveraging like someone with one $100K rental who can’t grow otherwise.
Do you want a $12N portfolio at the end? A $500M portfolio?
Why do you want?
How involved do you want to be?
Say you become a somewhat skilled RE operator and buy $3M of real estate in the next two years at a $1M discount. Is it worth the effort over working your job, or over doing nothing?
Answer these questions – for yourself and the forum – before taking action.
As a property owner myself, the first thing I would do is create a basic spreadsheet to accurately calculate your net yield on each of these properties, and net cash if you sold them – subtract state and county excise taxes, cap gains, realtor fees and closing costs.
Then have an honest convo with your brother about the pros and cons of being joint landlords in California – do you even live near it? You may find that you can more easily grow your money in the passive stock market over time than dealing with tenants and maintenance. If you’re in tech you likely already know this. Now is your chance to fully take advantage of that free stepped up cost basis if you choose.
I don’t want to bash your dream and ambition, but 6M asset in one of the most tenant friendly state with probably most pro tenant for someone that had 0 real estate experience, this is rough
You mentioned your dad, can you hire him as property manager while you learn the business ?
What do you mean by “dead equity”?
After 17 years as a landlord, I would sell everything and invest in mutual funds, e.g., S&P500 mutual funds. The landlord/tenant laws in California are terrible from what little I hear. Also, if you are inheriting from a deceased person, you get a step-up basis to the current market value. As such, you pay zero capital gains tax when you sell. I am making like 12% return on investment from my mutual funds. I would be lucky to make 6% with rental property. The rental property involves repairs, regular maintenance, property tax, rental license, and dealing with tenant complaints and tenant vacancy. The mutual funds are zero work and liquid assets. If you rent more than 3 years you will lose the capital gains tax exemption.
Sell. As a LL in CA, i must tell you that state and local laws are heavily in favor of renters . LL have few rights.
Buy index funds for a greater return and less stress
Based on your post and other responses, you’re putting the cart before the horse. Stop worrying about “scaling” and focus on understanding what you have. You’ve been given a windfall, don’t squander it because you feel like you’re smart after reading things online.
The easiest way to squander an inheritance is using it to “invest” in an industry you have no experience in.