Renting to Friends and Family: Small Mistakes often turn to Big Ones
“‘Friendship is Friendship. Business is Business. Let’s not get them confused.”
Rental Business in itself is a tricky business and making family and friends your customers is sailing two boats at a time. And you certainly know where you end up like this. Am I exaggerating too much? Let me tell you why. I was also on those two boats three years back and yes it hurts real bad at last. Business got ruined. Friendship got ruined.
Renting to Friends and Family is not a wise decision, you can take as a business owner. Landlording is not just about renting your place to someone. It needs you to perform certain tasks in a specified manner in order to keep your landlord business profitable. But when you do business with friends and family, think to yourself whether can you put business before relationships?
Risks When Renting to Friends and Family
Still, you feel, you can pursue rental business with ease even if you rent to friends and family? Let us put in perspective, the method of working of a landlord when putting a tenant on the property. And how the profitability of business gets affected when that tenant is either your friend or your family.
Determining the Rent
When you are renting to a friend or a family member, you may feel like renting to them at a price lower than the current fair market value. But do you know this kind of charity can backfire and put you in financial trouble?
The biggest advantage of having a rental property is the tax breaks you can take on your rental income. You can deduct various expenses which include mortgage payments, interest payments, utilities, maintenance costs, depreciation and a lot more. What if you won’t be able to take these thousand dollars worth of deduction? And, even have to report all the rent received as your income?
There are certain tax implications applicable to you by the IRS when you rent to a friend or family. Not renting under the IRS rules, your property will quickly be considered under a personal use property and not a rental property.
Screening of the Tenant
The success of the landlord business depends a lot upon having good tenants on the property. In order to ensure the same, you are required to have a solid tenant screening put up in place. It is only after a complete background and credit check on the tenant, you should rent your place to the prospective tenants.
>>Never be unsure about tenants again: Screen them with confidence
But now imagine doing the same screening on your friend. Will you be able to do it? Most landlords can`t. Asking your friend whether he has a steady job and whether he will be able to make timely payments. Making your friend fill a rental application and taking his consent to do a credit check on him. Maybe you can do it. But it would have been tough for me for sure if I would be in your place.
Also, it is no denying that you are renting to a friend or maybe a family member and you mostly know their in and outs. You know whether they have any criminal record or how are they in person? But renting to them is a whole different story. They may not fulfill your rental criteria. It is only after renting to them that you can be sure how of a good renter they are. How well they take care of your property and your business.
Making a Lease Agreement
Not having a lease agreement or relying on a handshake agreement can be the worst mistake; a landlord can make in his career. Mostly every landlord is aware of this fact. Landlords of today understand how important aspect, a lease agreement has in a rental business and without which you can`t stay sure of smooth compliance of rights and responsibilities.
>>I use Rocket Lawyer to set up my Lease.
But when you are renting to friends, some landlords feel hesitant to enter into an agreement. The reason is obvious and they simply rent on handshake agreements with friends. However, when you are in business, anything can go wrong be it with your friends or family. In a rental business, you have certain responsibilities towards your tenant and similarly, the tenant has responsibilities too.
Landlord being the friend, the tenant expects leniencies and sometimes takes his duties lightly. Even if you want this friend of yours to comply with rules, you hardly bring this to him. And ultimately at some point, this leads to a problem and disagreements arise. In such cases, not only your business gets affected but your friendship also gets ruined.
Taking Security Deposit
Taking a security deposit from a tenant, you ensure that the tenant will keep you free from discrepancies and any kind of harm on the property. The tenant will hand over peaceful possession of your property when he vacates it. Imagine not taking a security deposit, can you be sure of the well-being of your property? I don’t think you can be.
Now ask yourself, whether you can ask for a security deposit from a friend when he is renting your place? What if he asks you why his landlord friend needs a security deposit? Ain`t his friend trusts him or does he worry about any kind of damage to the property? Or does he feel, rent will not be paid on time? In any case, I don’t want to be in a situation where I have to explain to my friend why I need a security deposit.
Even if the tenant friend is careful and there will be no chance of having damages. But still, damages and discrepancies can occur unintentionally. And most times, if any damage occurs, friends don’t report it in embarrassment. Also even if you find out the damage, you too feel embarrassed to ask money for it from your friend. But if you had the security deposit, you would have covered the cost from it.
Collecting Rent Payments
The beauty of owning a rental estate is that you can collect rent payments from it every month. But what if you face issues in doing so? It is often viewed that when you rent to friends, they consider rent payment as their last priority on their expenses list. The result of which, the rent payment will get delayed and being a friend, you even can`t compel them to pay it on the due date.
>>Need timely Rent Payments: Collect it like Pro Landlords
Think what if you have a mortgage on your rental property and you are dependent on monthly rent checks to pay the installments? Will you be able to accept late payments in that case? Even if you want to confront your friend about your situation, you may not do it out of courtesy. In case if you confront him, you may get rent payment on time but that too will not go long.
The main reason behind it is you can’t program your friend to pay rent on time. You don’t have a lease set up in place, you can’t ask for late payment charges. You have to act in accordance with your friend if he gives you a reason why his payments are late. Say something and see your friendship getting complicated or even sour.
Eviction is the most unfavorable part of a rental business. Imagine a situation where you have to evict a friend. It is estimated that the US alone sees 2.3 million evictions every year. A rate of four evictions every minute. Feel yourself lucky if you haven’t yet got the need to walk this path.
Making an eviction is not easy and evicting a friend is one hell of a thorn in the flesh. Also as said above, most landlords renting to friends don’t make rent agreements. Such are the landlords who face the most trouble. Disagreements are a common sight when you rely on handshake agreements.
Let me quote an instance where one of my landlord friends has given an empty unit to his friend for a few days as he doesn’t have a place to live. After a few days, when my landlord inquired about his move out, his friend simply denied it. It took him 3 months after that to completely evict this friend from his property. Let’s leave the inconvenience aside, my friend even has to bear costs out of his pocket unnecessarily for the eviction.
What other Landlords feel about Renting to Friends?
- Lucas Hall from Landlordology says, “Just don`t do it. It can change your relationship for the worst.”
- Eric from No Nonsense Landlord says, “The first thing you need to do when renting to family and friends is to say no and move on.”
There are thousands of renters in the market. Why you want to risk your business and relationships by mixing them together. Better to stay off from this and search for other renters. It may feel good to rent to somebody you know but there are more chances of it backfiring on you.
And still, if you feel you can swim against the waves. My last piece of advice would be to hire a property manager if you are renting to friends or family. This way you will have a kind of screen acting between you and your friend. Till then, Happy Landlording!!
And if you have any stories related to renting to a friend or a family member, we will be more than happy to hear your part.