I get the temptation. You have a rental home and a family member or friend is interested in renting it.
Sounds like a nice idea.
Even sounds noble.
And sometimes it is those things. Sometimes the friend/family member moves in, pays rent, leaves the property in good condition, and your relationship is better because of it.
You’ve helped them out, they've helped you out.
But having been in this industry for as long as I have, I’ve also heard plenty of the horror stories.
It’s a conversation I’ve had multiple times over the years, and it typically starts this way:
“So, I had a co-worker that I moved into my property. I didn’t charge them a deposit, I gave them a HUGE discount on rent, and they STILL can’t pay me. In fact, they haven’t paid me in THREE months. I just need to turn this property over to someone who can be the bad guy. I’m too nice.”
You have to feel for these people. I’m sure they enter into the relationship with the best of intentions. And I’m sure that most of the Tenants have every intention of honoring all the lease terms (assuming there is even a lease in place).
But, when things go bad, and the Landlord isn’t really equipped to handle the business like the business should be handled, things can quickly get out of control.
Lost rents mount.
Property damage likely occurs.
Relationships are ruined.
Everyone is unhappy.
So, I thought I would spend some time reviewing the Pros/Cons of renting your home to family and friends.
Pros: Renting Your Indianapolis Rental Property to Family/Friends
- Ease of Entry - If you know someone who needs a property to rent, and you actually have a property to rent, there’s little to no advertising required, generally only one showing to schedule and probably very little negotiation to go through. Anyone who has rented a home before realizes that advertising can be expensive, showings can become exhausting and almost everyone wants to negotiate something... rent, paint colors, deposit amount, etc.
A friend or family member, in most cases, is more willing to move forward with the terms you suggest, which does make your life easier.
- Asset Building - I’m sure you’ve heard of people who buy homes for the purpose of providing housing to a family member. It’s common and I think makes sense in some cases. For example, my son will be entering college within the next two years.
He’s strongly considering Indiana University (yes, he was raised very well) in Bloomington. My wife and I regularly discuss the idea of buying a property in Bloomington and allowing our son and roommates to live there. We will, of course, charge rent and manage the home like any of our others.
At the end of his time in Bloomington, my daughter, three years younger, may take over the lease if she decides to attend IU, or we could sell it - hopefully for a profit - or keep it as a rental for future Hoosiers.
- Familiarity - Obviously, if you are renting to someone you know that means you, well, know them.
You probably know where they work, have some idea about the income they make and probably have some insight into their previous housing experiences. So, when you screen them, and you should screen them, it should be easier to collect good data.
Every Landlord or Property Manager has received false information from applicants. Renting to someone you know should alleviate that.
Cons: Renting Your Indianapolis Rental Property to Family/Friends
- Tax Issues. A common scenario when renting to family and friends is offering the old family and friend's discount.
However, the IRS frowns on Landlords who offer discounts to family or friends. In fact, if you don’t charge fair market rent for the property, you can’t take most of the standard rental property deductions (repairs and maintenance, for example) which is a major benefit of owning rental real estate. You need to be aware of the tax consequences.
- Potential Relationship Trouble. As I've already noted, there are too many examples to count of relationships that have gone south because of a bad Landlord/Tenant relationship. Even if you do everything the right way, things can go wrong. It's one thing to evict a Tenant you don't really know. It's an entirely different thing to evict a co-worker you'll have to see the next day.
Indianapolis Property Manager's Advice
Yes, we've been around a while. We've seen a lot of things. And having been in the Indianapolis property management business since 2000, my advice is to avoid, at all costs, renting to family and friends.
It might make that family member or co-worker a little miffed, but if you simply relay the fact that you value the relationship and want to avoid any trouble down the road, they should understand.
Or, blame me, instead. I can be the bad guy.
I discourage renting to family and friends for one major main reason:
Being a Landlord is a business. Yes, we preach that a lot and it’s true. Unless you are fully prepared to screen that family member or friend and treat them like anyone else who rents your home (meaning evict them as soon as trouble starts), don’t do it. Most people can’t draw that line and I totally get it.
There are plenty of Tenants in the sea, so just go find them.
If you Choose to Rent Your Indianapolis Rental Home to Family/Friends
Now, if you choose to ignore that advice (and you wouldn't be the first person) here are a couple of things I ask you to consider if you do in fact decide to rent to family and friends:
- Be upfront with them. Tell them, plainly, that your investment property is important to you - which it is - and that it’s important that the “business end” of the deal is held up. And also, that, if it’s not, you are prepared to do what’s necessary to protect your property, up to and including eviction.
Now, if things go wrong, both parties will still likely have some hard feelings, but at least you warned them.
2. Be consistent. For many reasons, including potential Fair Housing issues, you need to treat this person the same way you would any other Tenant when it comes to managing the property. Be sure to screen them, be sure to collect a deposit, be sure to sign a lease, and be sure to enforce the terms of the lease whenever issues may arise.
Again, this can be a tricky topic and I hope I've provided you some good insight into the pros and cons of renting your home to family and friends.