Regardless of what anyone may tell you, making a decisions to rent to friends and family is not a simple affair. On the surface, it may seem like it saves you from having to go through the various stages of renting out a property, such as advertising and using a property manager. However, these time/cost saving measures can often lead to issues somewhere down the line. If you do decide to rent your property out to a family member or friend, make sure you have considered the following points.
Establish your relationship
The most important thing you need to do before renting to friends and family is establish what sort of relationship you are going to have with your tenant as their landlord.
Will it be a traditional landlord/tenant relationship? You may both decide that this is for the best, to limit any chance of disagreements. If this is the case, consider using a property manager to act as a third party who can formalise this arrangement.
If you want to enjoy the benefits of having a closer relationship with your tenant, make sure you sit down with your family member/friend and nut out exactly how this is going to work. Having open lines of communication at the start will save you a headache in the future.
While a tenancy agreement is a definite must, how will you conduct inspections? Will you work together on improvements to the property? If you pay for materials, can you save money if they have their own input into cosmetic renovations, such as painting?
More important than anything is that your tenant understands that you still have an investment you need to pay off, and that you may only be able to cover them for a maximum of one month or similar if they happen to struggle to pay rent. Make sure that they are aware that you are not at their beck and call for every minor thing that they want looked at in the property. By the same token, be aware that you can’t just go over whenever you like just because you happen to be their friend.
Use your knowledge of the tenant
An often-underestimated advantage to renting to friends and family is that you have a deep insight into what sort of tenant they will be.
Don’t compromise on your criteria for a tenant. Evaluate whether they match up to what you want, and use your knowledge of them to gauge whether there will be future problems. Have they been an on-again-off-again smoker for the past 10 years? Will this be a problem? Have they been thinking seriously of buying a dog in the past year? Have they been clean and conscientious tenants in the past or can you remember them having previous issues?
You have the greatest gift as their friend and potential landlord because you know them better than anyone else, and so can make some educated guesses as to what sort of tenant they will be. If they don’t meet your expectations, it may be better to deal with some short-term disappointment rather than long-term disaster. If they are in dire straits, you can offer them a place to sleep in the short term within your home, short of offering them an entire tenancy agreement.
Read more: How to be a good tenant
The benefits of renting to friends and family
- You have someone you trust as a caretaker of your investment. They may be more conscientious of accidental damage to the property, such as walking in dirt or moving furniture that may damage carpets/wood flooring.
- You can save money on dealing with a property manager and advertising costs.
- You can have easier access to the property in the case of maintaining it and doing renovations/repairs.
The risks of renting to friends and family
- Your tenant may feel ‘special’ and as such start to abuse the delicate arrangement you have, through requesting repairs too often for minor issues etc.
- The old tenet that money should be kept out of a relationship exists for a reason. There are some situations you may not be able to predict and protect yourself from. You need to be sure that this arrangement will work.
- You may find yourself out of pocket in the occurrence that your tenant cannot pay. In this case, you may feel that you can’t serve them with an arrears notice or a similar action. Factor this in your budget before taking on your friends/family as tenants. Can you afford it if they cannot afford a month’s rent?
- You may find it harder to increase your rent, which you are entitled to do at the most one time in any six-month period, so long as it is reflective of the market, it isn’t considered unreasonable and that this is stipulated in the tenancy agreement.