Have you ever dreamt of investing in real estate or owning a vacation home? My husband and I talked numerous times in the past about doing both but remained reluctant to pull the trigger. However, we are now embarking on our second property transaction in less than 18 months; accidental landlording prompted by love instead of profits.
After visiting Florida with friends in 2012 and again 2013, John and I discussed purchasing a vacation/rental home there that would ultimately become our snowbird destination in retirement.
Around the same time, we also pondered entering the real estate game in our home state either renting or flipping houses instead.
I read lots of information on real estate investing, discussed some pros and cons with my brother who owns a handful of rental properties, and ran lots of financial and mortgage calculations.
While we never ruled out the idea, John and I did not make a conscious decision to move forward with any property purchases either. In January of 2016 that changed.
Look Out Florida, Here She Comes
My mom retired in late 2015 with eager plans to spend the winter of 2016 in the warmth of the sunshine state. She found a home to rent for three months, and in early January I drove her down with the intention of settling her in and flying home after a week. Within two days we were setting up a plan B.
While we were near the land of Walt Disney, the mice we were encountering were not Mickey and Minnie. I refused to leave mom with them, and the hunt for a new rental ensued. (Note: The rental had more issues than just the mice. Getting recommendations from family and friends isn’t always enough.)
At the height of the snowbird season finding another short-term rental proved extremely difficult. Eventually, we began looking at homes for sale in retirement communities but didn’t want to make any hasty decisions. Instead, we drove 1200 miles back home after only three nights at the rental and one at a nearby hotel.
Upon her unexpected return home, mom encountered some additional life changes which prompted a move in with us at the end of January. She continued to harbor an intense desire for Florida and warmer weather.
Ultimately we decided to purchase one of the homes we toured while in Florida and finalized the sale in late February. Thanks to mom and us each having a healthy opportunity/emergency fund we were able to act on this transaction with just a small loan which we then paid off in less than a year.
We took mom back to Florida then, and she spent an enjoyable 2 1/2 months getting familiar with her new community. She plans to spend approximately six months there each year, and we vacation there 2 – 3 times per year.
In the year and a half since the Florida home purchase, John and I’ve also been fortunate to rebuild our opportunity fund due to well-paying careers and side hustles. That fund is now coming in handy again.
Accidental Landlording or How Not to Buy a Rental Property
Recently, we learned some loved ones were in an unfortunate situation of not being able to find an affordable home to rent. Regrettable prior decisions, simple mistakes, some poor luck, and bad timing put them in a position of an expiring lease with no new place to go.
Within a couple of days of learning about their predicament, we decided to purchase a home that they will rent from us. Now, just ten days later we’ve already applied for the mortgage on a single family rental property.
While I continue to believe we are doing the right thing for our family, and we are going into this transaction with our eyes wide open, I fully admit it is not the wisest financial move. Here’s why:
- We are buying in a seller’s market – Housing prices in our area are higher than they have been in years. Sellers are receiving multiple offers and homes are snapped up in days if not hours of being listed. In fact, we put in our offer on the house we are buying in less than 24 hours of its listing. Two other proposals were received, but we had the strongest offer.
- We are buying a home that is move-in ready versus a fixer-upper – John and I enjoy DIY, and we always thought we would find a rental income property in need of some TLC and improvements. The fixer-upper homes we viewed were either in need of way too much work or were just priced too high. Ultimately we found a home that was well cared for and only needs some minor touch-ups.
- I was viewing homes specifically for them versus viewing homes for rental income – I found myself evaluating each home we toured with our family in mind, wondering if they would like certain aspects. Separating needs versus wants became critical.
- A mortgage is needed – John and I had no plans to take on additional debt, the mortgage on our home is our only current debt, so this was a huge decision. Interest rates have risen a bit, and the interest rate on investment property is even higher. Our ‘renters’ of course will be covering the payments.
- Our opportunity/emergency fund will be nearly depleted – This fund has gotten some use that’s for sure! Once again we will tap it and work to rebuild it quickly. Because we have no other debt and spend very little on wants, this shouldn’t prove too difficult, but it is a concern.
- Unexpected events happen all the time – On the verge of becoming accidental landlords, I have a healthy concern for the next potential unplanned incident. Without a funded emergency account we may need to dip into other savings accounts delaying other goals.
- Emotions are involved – It’s family and finances, need I say more?
Risks and Expectations When Renting To Family
There are risks with any investment in real estate. Add the mix of family, and you may also increase the complexity.
I’ve spent hours and hours identifying potential risks, outlining our expectations, and communicating with our family members to understand theirs as well.
Due to prior considerations, experience renting and purchasing real estate, reading of numerous personal finance websites and books, and discussions with real estate experts and current landlords, however, I do feel more prepared than many probably would, given the above situation.
We’ve been acting very fast in executing this real estate transaction, and while I feel prepared, there’s no doubt there are things we haven’t considered.
Additionally, we know things often don’t go as planned no matter how much preparation happens.
Things to consider:
- Additional costs beyond the purchase price such as inspection and closing costs
- Lease length and other terms
- Fair market rental rates
- Non-homestead property taxes
- Property insurance
- Rental insurance
- Additional liability protection
- Personal tax implications
- Repairs and improvements
- Utility costs
As mentioned above, there are risks with any investment in real estate. When you add the mix of family, you may add another layer of complexity with emotions and additional expectations you wouldn’t have with strangers. With open communication, structured agreements, and managed expectations, on both sides, things can work out satisfactorily for all.
Accidental landlording may potentially delay our FIre (financial independence/retire early) goals. However, love trumps money this time.
Let me hear from you now. Do you have rental properties or are you considering investing in real estate? Any experience renting to a family member? Have you ever fallen into accidental landlording? Are we completely nuts? Please feel free to share your thoughts and any advice below.
Update: The rental house is purchased and the lease is signed! Check out the next Accidental Landlording article, dealing with how to rent to relatives.
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Oh wow, what a story! No experience in rental investing here, but best of luck and you move into this new phase 🙂
I am sure you have already considered this, but I would imagine that it could be hard to keep the line between family and renter straight at times (I’ve seen this in family businesses, etc). It may be helpful to set up clear guidelines around the renting so that there is less of a chance for an unpleasant surprise/situation for either party.
I think it is very admirable of you to help a family in need. Like you said, love trumps money 🙂
Thank you, Mrs. AR. We have already set many ground rules and guidelines, but it’s an evolving list. I appreciate the comment and kind words!
Absolutely love BiggerPockets! They are brilliant and my inspiration for jumping into RE. Sorry there’s been difficulties, but in the end, once you get everything up and running and are able to replenish your savings, it’ll work out!
I have no doubt they’ve inspired many! 🙂 Thanks, Lance, I’m remaining optimistic!
Wow – so exciting and so terrifying at the same time. I think Mr. & Mrs. Our Next Life did this too. Did you know that? “Choosing people over money”
https://ournextlife.com/2016/08/29/rental-property/ No – you’re not crazy because you clearly see all that could go wrong. We do own a number of rental properties but we have never rented to family. We have rented to people for over 20 years though – and never raised their rent. We weren’t close in terms of having a personal relationship – but we always treated them like family. We choose people over money too.
You’ve got it exactly, Vicki! Thanks for sharing ONL’s post. As I mentioned on Twitter, I knew they had a rental for a family member but I couldn’t recall the title.
That’s incredible you’ve rented to the same people for over 20 years. I’m guessing you received the same treatment in return. Awesome! 🙂
I think what you are doing is amazing, Amy! You’re putting your family first and there’s nothing at all wrong with that!
Some days I wonder if we made the right decision buying our fixer upper (which is taking any/all of our time lately), but the way I see it, it’s a learning experience. We’ve learned so much already and even though we are a little stressed right now, we can use what we learn to move forward. I think you could look at your purchase in the same light. There’s always the opportunity to learn what you will/won’t do differently next time. 🙂
I’ve been wondering how you guys are doing these last couple of weeks. Definitely a learning experience for all of us. I look forward to hearing more about your adventure as time goes. Thanks for the kind words and thoughts, Amanda!
What a kind and generous thing you are doing for your family members! My dad did this with my brother, and while I might wish that he’d kept the rental agreement more businesslike, it never quite worked out like that. There were grandkids involved, though, so I understand him not really pushing when my brother didn’t pay his rent.
Based on that experience, I’d suggest that you’ll need to be very clear, at least with yourselves, on what you’ll do if your family members do not meet your expectations as tenants.
We currently have several rentals, mostly by keeping places we bought to live in. In one case, it probably shouldn’t have been a rental, but we turned it into a rental in 2008 when we couldn’t sell it. The others were bought with rental markets in mind and cash flow much better. I really would rather keep the tenant arrangements at arm’s length if at all possible, but understand that we might not always be able to keep that plan.
Thanks for sharing your family’s experience, as well as yours, Emily. I’m one that over thinks a lot, but I’m still wondering what I might be missing. Hearing and reading about other’s experiences is helpful. I appreciate your suggestion too, thanks!
Oh, Amy! You are so kindhearted. But I’m concerned for you and John. What about their ability to pay rent? Bad habits, bad decisions and bad luck do not necessarily change after someone throws you a lifeline. I hope it works out but I also hope you have an escape hatch at the ready.
Hi Mrs. G! We are identifying the safety ropes and exit plans just in case. What’s the saying, hope for the best, but plan for the worst? 🙂 Cautiously optimistic!
Wow, Amy! What a generous move for your family. I don’t have experience in rental investing, but this situation would definitely make me a little nervous! I’ve seen some family members try to do business together and it has always ended in a very difficult place. Keeping my fingers crossed that your amazing karma in this situation pays you back handsomely!
Thanks, Chelsea. I appreciate your kind words and good thoughts!
We’re renting to my wife’s parents now. The rental is actually our old house; we moved out in 2010 and decided to keep it rather than sell it when we bought.
I do hear you about renting to loved ones. It’s worked out, but there is tension between getting fair market rent and taking care of family. When the mortgage is paid off on that property (before end of next year) it does give flexibility either to work on something else, or to drop the rent more if needed, but the pressure to take care of family is still there. I feel called (commanded?) to do that, but it doesn’t necessarily make it easy.
We’ll see!
That seems to be it exactly, John. Feeling called…or yes, commanded…to aid others, especially family. Not easy, but I think it would be just as difficult if not more so, to not help them. Appreciate you sharing your experience. I hope things work out well for you too. Congrats on nearing the completion of that mortgage by the way. Thanks!
My wife and I talk about buying a home or condo in Florida. We want to go down south in the winter when we reach FIRE. We debate buying vs a seasonal rental. We also talk about renting it out when we do not use it. We are still very much in the discussion stage.
We were like you Dave, contemplating various scenarios. When outside factors arose it was pretty easy to make the decision due to prior considerations and research. So yes, discuss, discuss, discuss, but don’t be afraid to pull the trigger either. We have friends who’ve been ‘moving to Florida’ for 7 years now. Thanks for reading and commenting Dave!
Could this be disastrous? Yes. But your heart is in the right place and I salute you. There’s an old saying that God looks after drunks, orphans, and the United States of America. I have a feeling that we can sneak accidental landlords in there and God won’t mind. Keep me posted, Amy. I’m pulling for you and John. Cheers.
Thank you for the kind words and good thoughts, Mr. G. I like your perspective! 🙂
You are completely nuts, but it’s going to go well since you’re prepared for anything!
Also, thanks for this post…it just reminded me, at the end of the long day I just had, that my in-laws are buying a beach house in Delaware that we get to take free vacations to before they move in full-time…a pleasant surprise for us!
Thanks, I needed to hear that! 🙂
Well, that’s cool. I hope you are now looking at your calendar and checking with your wife to set a date for your next vacation! Enjoy your weekend!
My husband and I became accidental landlords, too, when country acreage with a house became available right by my husband’s brother (400 miles from our home). We plan to retire there (do other jobs) in five years or so, but the rental house helps pay the mortgage on the land. We visit often and have a cabin, workshop and pastures there but employ a property manager to handle most tenant needs. In three and a half years, we just had our fourth family move in. Two of the families were great, paid on time and bought homes at the end of the one-year lease. The other family struggled to pay rent and moved out early. It’s an adventure, for sure, but helped us buy our retirement place sooner than expected. Best of luck to you, Amy!
That sounds like a really good situation, Sandra! I’m sure it’s not exactly easy from so far away, but I can understand the comfort of knowing you have your future home already secured. Thank you for the best wishes, and the same to you, Sandra. Thanks for stopping by and commenting!
What a way to jump into being a landlord! My aunt and uncle have a number of rental properties. While some of them have happened a more traditional way, others have happened much the way you describe. While the numbers may not pencil quite as well, I don’t think they have any regrets about the way they were able to help out their family.
That’s so nice to hear your Aunt and Uncle don’t have any regrets. It can be such a touchy situation. Thanks, Melanie!