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Upsides and Downsides of Rentals With Friends and Relatives

By Bill Gassett | August 16, 2023

Are you considering a rental agreement with a relative or close friend?

Renting to friends or family comes with its own set of advantages and disadvantages. On the one hand, it can help save on marketing costs and provide a better understanding of their character. It may also lead to more straightforward problem resolution and a sense of obligation for timely payments.

However, challenges may arise in balancing personal relationships with business, expectations for special treatment, and potential liberties taken with the property. Establishing clear expectations, treating all residents equally, and considering flexibility in some instances is essential.

Additionally, understanding tax regulations and treating friends or family like any other tenant are vital factors.

Pros of Renting to Friends or Family

When it comes to renting to friends or family, there are several advantages worth considering:

Cost Savings in Marketing

One of the benefits of renting to friends or family is the potential cost savings in marketing. Unlike renting to strangers, you can skip the expense of advertising, listing fees, or hiring a Realtor to find a tenant. By relying on your network, you can save money and time attracting potential renters.

Familiarity with Character

Renting to friends or family offers the advantage of familiarity with their character. You have a better understanding of their personalities, habits, and reliability. This knowledge can help you decide whether they are suitable tenants who will treat your property with care and respect.

Easier Problem Resolution

Dealing with problems or maintenance issues can be smoother when renting to friends or family. Communication and cooperation are often more accessible since you have an existing relationship.

Discussing concerns, addressing issues promptly, and finding mutually agreeable solutions may be more comfortable without formal mediation or legal intervention.

Sense of Obligation for Timely Payments

When renting to friends or family, there is usually a sense of obligation for timely payments. Your connection and history can motivate them to fulfill their financial responsibilities. This can help ensure consistent and on-time rent payments, providing you with a reliable source of income and reducing the stress associated with late or missed payments.

Cons of Renting to Friends or Family

Renting to friends or relatives may come with specific challenges that must be considered. We will explore some cons of renting to those close to us.

Difficulty Combining Personal Relationships and Business

One of the main challenges of renting to friends or family is balancing personal relationships with business. When personal and financial matters intersect, separating emotions from business decisions can become complicated. Disputes or disagreements regarding the rental agreement may strain or damage the relationship.

Expectations for Special Treatment

Another potential downside is the expectation of special treatment. Friends or family members may assume they are entitled to preferential treatment due to their relationship with the landlord. This can lead to conflicts, as treating all tenants fairly and equally is essential. Failure to do so may result in tension and resentment within the relationship.

Taking Liberties with the Property

Renting to friends or family can also present challenges related to property boundaries. Some tenants may feel more comfortable taking liberties with the property than they wouldn't with a regular landlord. This could include being lax with property maintenance, exceeding the lease terms, or disregarding rules and regulations.

Such behavior can strain the landlord-tenant relationship and potentially damage personal connections.

A few years ago, a client rented their home to a friend in Ashland, Massachusetts. The experience was unpleasant, and the owner decided selling was better.

I listed and sold his home shortly thereafter. In my experiences as a real estate agent, renting to those close to you can be tricky.

Renting to own a home can be just as slippery. Being extra careful is always prudent in these situations.

Establishing Clear Expectations and Fair Treatment

When renting to friends or relatives, it is essential to establish clear expectations and ensure fair treatment for all parties involved. We will focus on three key aspects: setting clear expectations, treating all residents equally, and being flexible in some instances.

Importance of Setting Clear Expectations

Setting clear expectations is crucial to avoid misunderstandings and potential conflicts. As a landlord, it is essential to communicate the terms of the rental agreement, including the rent amount, payment schedule, and any rules or regulations associated with the property.

Doing so creates a transparent environment and reduces the chances of disputes arising due to miscommunication.

Treating All Residents Equally

Regardless of the personal relationship, it is essential to treat all residents equally. This means applying the same standards and policies to friends or family members renting your property as you would with any other tenant.

It is crucial to avoid making exceptions or providing preferential treatment solely based on personal relationships. Maintaining consistency prevents potential conflicts and ensures fair treatment for all residents.

Being Flexible in Certain Cases

While treating all residents equally is crucial, being flexible in some instances can be beneficial. Life circumstances change, and even responsible tenants may face temporary financial difficulties. If a friend or family member encounters such challenges but has otherwise been a reliable tenant, considering flexibility in adjusting the payment schedule or offering temporary assistance can be an option.

However, assessing each situation individually and making informed decisions while considering the overall business interests is essential.

Establishing clear expectations, treating all residents equally, and being flexible when necessary create a fair and transparent rental environment for friends, family members, and yourself. These practices help maintain healthy personal relationships and minimize potential conflicts and complications when mixing private and business arrangements.

The Complexity of Tax Regulations and Personal Use

When considering renting to friends or family, it is crucial to familiarize oneself with the complex tax regulations surrounding personal use of the property. Understanding the implications of such rules is vital for both landlords and tenants.

Understanding Tax Implications

Renting to friends or family can have significant tax implications that must be carefully examined. Landlords must understand how rental income, expenses, and deductions are affected when renting to individuals with personal relationships. It is recommended to consult with a qualified tax professional or research the IRS guidelines about rental properties.

Effects on Rental Deductions under IRS Rules

Under IRS rules, the time a property is used for personal purposes can impact the ability to deduct typical rental deductions. According to the IRS's '14 days a year' rule, landlords may face limitations on deducting certain expenses if the property is used personally beyond a specific threshold. This aspect further highlights the necessity of understanding and complying with tax regulations when renting to friends or family.

Benefits and Risks of Renting to Friends or Family

Renting to friends or family can offer particular advantages and disadvantages. Considering the benefits and potential risks when entering a rental agreement with close acquaintances is crucial.

Ease in Selection Process and Trust

One of the benefits of renting to friends or family is the ease of the selection process. Since you already have a personal relationship with them, there is an existing level of trust and familiarity. You may have a good understanding of their character, financial stability, and overall reliability as a tenant. This can make the screening and decision-making process less time-consuming and potentially more efficient.

Risks of Expecting Special Treatment or Irresponsibility

However, renting to friends or family also comes with risks. One such risk is the expectation of receiving special treatment. Friends or family members may assume they will be given preferential treatment or that specific rules or responsibilities can be overlooked. This can create an imbalance in the landlord-tenant relationship and potentially lead to issues related to late payments, property damage, or disputes over property usage.

Another risk is the potential for irresponsibility by the friend or family member as a tenant. They may not take the rental agreement as seriously as they would with a non-relational landlord-tenant arrangement. This can result in financial strain, difficulties enforcing lease terms, and potential strain on the personal relationship.

Potential Impact on Personal Relationships

Another significant consideration is the potential impact on personal relationships. Disagreements or conflicts related to the rental arrangement can strain or damage the existing emotional bond. The stress of financial or property-related issues can escalate quickly and cause rifts that may take time to heal.

It is crucial to weigh these benefits and risks carefully before renting to friends or family. Open communication, clear expectations, and establishing boundaries can help navigate and mitigate potential challenges in maintaining an excellent landlord-tenant relationship and a healthy personal connection.

Treating Friends or Family as Any Other Tenant

When renting to friends or family, treating them like any other tenant is essential to maintain fairness and professionalism in the landlord-tenant relationship. This means following standard procedures and evaluating their financial situation and references.

Evaluating Financial Situation and References

Before entering into a rental agreement, it is crucial to assess their financial stability. Requesting income verification, employment history, and credit checks can help determine their ability to meet the financial obligations of the tenancy.

In addition to financial evaluation, obtaining references from previous landlords or professional contacts can provide valuable insights into their rental history and overall reliability as tenants. These references should be given the same weight and consideration as references for non-familial or non-friendly tenants.

Following Standard Procedures

Following standard procedures when renting to friends or family helps establish clear boundaries and expectations. It is essential to have a written lease agreement that outlines all terms and conditions, including rent amount, due date, and late fee policies.

Furthermore, maintain regular communication with your friends or family tenants just as you would with any other tenant. Provide a formal process for maintenance requests, inspections, and lease renewals to ensure all parties understand their rights and responsibilities.

  • Communicate rent increases, if applicable, with proper notice and in line with local regulations.
  • Handle repair requests promptly, demonstrating professionalism and dedication to maintaining the property.
  • Conduct regular inspections to ensure the property is well-maintained and address any issues promptly.
  • Renew or terminate leases following proper legal procedures and providing sufficient notice.

Treating your friends or relatives as any other tenant creates a fair and professional rental environment that minimizes the potential for misunderstandings or strained relationships.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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