Renting a home to tenants can be a great way to earn some extra income on a very flexible schedule. The funds you earn from renting your property could even go toward investing in more properties, effectively increasing your yearly earnings significantly over time.
Most landlords rent their properties to people they don’t know personally but have screened to make sure they’re a good fit. But what if your potential tenant is someone you do know personally, such as a friend or even a family member?
Going into any kind of working relationship with a relative or close friend can be a sticky situation. You should be as prepared as possible for the potential benefits and drawbacks. Here are some things to consider before renting to family and friends as a property owner.
What Are the Pros of Renting to Family and Friends?
There are several benefits you could enjoy by offering a lease agreement to a family member or friend. One of the most obvious is that you get to lend a helping hand to someone close to you who needs a place to live, and this action could even strengthen your relationship moving forward.
If you know your friend or relative to be trustworthy, you’ve already skipped one of the most high-stakes steps in the process of finding a tenant. Even when landlords find tenants who seem like a great fit, there could still be issues down the road. You can’t fully get to know someone within the time it takes to sign a lease agreement.
Additionally, advertising your property is a time-consuming responsibility. In order to find high-quality tenants, you have to take high-definition photos, write a thorough description of the home, and keep all of your online postings up to date. When you rent to someone you know, you can skip this step and go straight to drafting up a lease agreement that works for both parties.
What Are the Drawbacks of Renting to Family and Friends?
Contracts and the exchange of money can complicate relationships between family members and friends. Even if you know your potential tenant very well, the addition of the landlord-tenant layer to your relationship could bring out sides in both of you that aren’t conducive to the success of the tenancy (or your relationship in general).
It’s possible that when renting to family and friends, your tenants could take advantage of your close relationship by asking for reductions or extensions on rent or failing to respect typical landlord-tenant boundaries in other ways.
Managing Relationships When Renting to Family and Friends
As a landlord, renting to family and friends can be a very fulfilling experience. However, it’s important to make sure you’re setting yourself and your tenants up for success in the long term.
Boundaries are a crucial part of any relationship, but when you’re renting to relatives and friends, setting clear boundaries before move-in day is especially important in order to set yourselves up for a successful working relationship.
Make sure your friend or family member signs a lease just like any other tenant so the stipulations of their tenancy — as well as the responsibilities of both parties in the relationship — are clearly laid out. You should also outline exact rent costs, and rent payment expectations.
This means that if your relative or friend breaks the lease agreement in any way, you should be prepared to deal with the situation the same way you would if you didn’t know the tenant personally.
How Do Taxes Work When Renting to Relatives?
Homeowners have to pay property taxes whether they live on the property or not, but some of the specifics change based on how the property is being used.
If you don’t personally use a property you own for more than 14 days per year but you allow a relative to live there free of charge, the home is still taxed as a personal residence and you don’t have to claim rental income.
Conversely, if you don’t use the property for more than 14 days in a year and you collect rent from your family member just like you would a regular tenant, the property can legally be categorized as a rental and you can claim your property management expenses on your tax return.