Renting to Friends & Family
Renting to Friends & Family
Renting to friends and family members can be a double-edged sword. On the one hand, it can create a comfortable and familiar environment for both parties, while on the other hand, it can create tensions that can damage long-term relationships. Landlords who are considering renting to friends or family members should carefully consider the potential benefits and pitfalls of such an arrangement.
Benefits of Renting to Friends and Family:
Trustworthy Renters
One of the main benefits of renting to friends or family members is the level of trust that can be established between the landlord and tenant. One of the hardest things about being a landlord is vetting potential tenants and building a trusting relationship with them. This complication disappears if you rent to someone that you have a long history with. When there is already an existing relationship between the two parties, communication and resolving issues can become easier. Friends and family members are also more likely to respect the property and take care of it as if it were their own. The landlord will have more peace of mind if they are confident that the tenant will take care of their property.
Reduced Screenings and Free Advertising
Another advantage of renting to friends or family members is that it can be easier to find tenants. Chase suggests that renting to someone you know and trust can eliminate the need for extensive background checks and credit screenings, which can save time and money. Additionally, landlords may be more flexible with payment arrangements or security deposits if they know the tenant personally.
My VR advises that when renting to friends or family members, offer them a good rate that still covers costs, but is below the competitive price. Let them know that they are receiving a special deal because of your friendship, and ask them to recommend the building to people that they work with or interact with. Although you are giving them a good deal, you will potentially make up the difference in free advertising and filling any current vacancies! My VR also suggests that you can also barter deals with family and friends who want to rent. If they have special skills that can benefit you, consider utilizing these as part of your rental agreement! If they have skills like financial, business, handyman, web design, child care, lawn care etc… request that they spend a designated amount of time each month investing in the property management and care. For example, you give them a $200 break in rent each month but in return they help to shovel snow during the winter and weed flower beds for up to 3 hours each month. Keep in mind that these items need to be very specific and included in the rental contract if both the landlord and tenant are to take the agreement seriously.
Potential for Family Tax Benefits
When renting to a close relative, there is a potential to receive certain tax benefits that would not apply to someone that is renting to friends. PayRent advises that there are tax advantages when using a property as a primary residence for a family member when the family member can live there rent free (the homeowner does not collect rental income). The property will be taxed as a personal residence because it is rented to immediate family instead of traditional tenants and there is no claim on rental income. If you decide to charge the family member rent, then you would need to claim the rental income and the property would be taxed as a rental, but you can then deduct the property management expenses (mortgage costs, utilities, maintenance, and depreciation) from your taxes.
Negatives of Renting to Friends and Family:
Ruining Relationships
While renting to friends or family members can have its advantages, there are also potential downsides to consider. One of the biggest concerns is the potential damage it can cause to the relationship as well as the potential to reduce investment income. If there are any conflicts or issues that arise during the tenancy, it can be difficult to separate personal and business matters, which can lead to strained relationships.
Screenings and Scrutiny
For obvious reasons, renting to friends or family members can make it more difficult for landlords to enforce rules and policies. They may feel uncomfortable enforcing late fees or initiating eviction proceedings, which can result in lost income and damaged property. Become a Pro Landlord suggests that even though it may be very awkward, do a tenant screening regardless of who you are renting to! If you don’t feel comfortable knowing a friend or family member’s credit history, criminal background, and rental history you may not be ready for a friend/landlord relationship. If you are not comfortable performing the screening and lease process, do not skip it and rent to your friend or family member without proper paperwork.
Favoritism and Feelings
Another potential issue with renting to friends or family members is the perception of favoritism. Other tenants may feel that they are not receiving the same treatment or attention as the landlord's friend or family member. This can lead to resentment and create a hostile environment among tenants.
Not only can the favoritism be sensed among other tenants, sometimes friends and family members who are renting often expect to be treated with special discounts and perks that might not apply to other renters. Vacasa suggests reminding friends and families that the rental is your business and not a hobby. They also suggest that all friends and family member sign a binding lease agreement to avoid awkward requests for payment extensions or fee waivers.
Tips for Renting to Friends and Family
If a landlord decides to rent to a friend or family member, there are several steps they can take to help prevent potential conflicts and ensure a positive experience.
First, it's important to establish clear boundaries and expectations at the outset of the tenancy. This includes setting rent payment due dates, discussing any lease terms or rules, and outlining the process for addressing any issues that may arise. If you struggle with clear and concise communication, especially with confrontation, consider referring to “Mastering Confrontation: Become an Expert at Effective Communication. Master the Art of Dealing with Conflict” before taking on the complicated role of friend/landlord.
It's also important to maintain a professional relationship throughout the tenancy. Landlords should communicate with their friend or family member in the same manner as they would with any other tenant. This means responding to requests or complaints promptly and enforcing policies consistently.
Landlords should also consider requiring proof of insurance from their friend or family member, just as they would with any other tenant. This can protect both parties in the event of damage or liability claims.
Lastly, landlords should be prepared to handle difficult situations professionally and without bias. If conflicts arise, they should be handled in a manner that is fair and consistent with the lease terms.