Renting to relatives (or friends), while perhaps tricky to negotiate, can benefit both you and them.
Experts say establishing boundaries early on and creating a simple but effective business rental relationship will keep you thinking like a property owner and landlord when it comes to any housing transactions, regardless of your past, current, or future relationship.
In my prior post on accidental landlording, I mentioned being in the process of buying an investment property to rent to family members. Now the house purchase is complete, the lease signed, rent’s collected, and healthy relationships are still intact.
Here’s a brief update on what went down and how we strived to create a win-win scenario for us all.
Within ten days of learning about our relatives need for a place to call home, we found an attractive property to purchase, obtained an ‘all is good’ home inspection, and applied for a mortgage. Four weeks later we signed the mortgage and purchase documents.
The house is a 1950’s ranch in an established neighborhood with good schools. As mentioned in my previous post it is currently a seller’s market, and we offered just over asking price for the home on its second day on the market. (The appraisal came back $3k over the purchase price, phew!)
We chose this home as it could be a nice long-term house for our relatives as well as a good rental property for future tenants. It’s also a home we could consider downsizing into one day if our renting family members do not continue to lease it.
The house deets:
- Single-family home
- 1200 sq. ft.
- 3 bedrooms
- 1 1/2 baths – nicely updated full bath
- Partially finished full basement
- Hardwood floors in living room and bedrooms
- Newer refrigerator and stove, with working dishwasher, washer and dryer
- Detached 2-car garage
- 30-year loan
- 15% down payment and yes, this means private mortgage insurance (PMI)
- Fixed rate of 4.75% with no points (higher because it is an investment property)
I wouldn’t necessarily recommend this course of action, but it’s what seemed to work best for us in this situation.
Considerations, Decisions, and Agreements When You Rent to Relatives
There are numerous things to deal with when purchasing an investment property to rent, and even more when you’re planning to rent to relatives.
Working through these matters as early as possible will benefit you greatly so please don’t procrastinate should you find yourself in this situation.
We managed to tackle most of these by the end of the home inspection, so we felt right proceeding with the house purchase.
- Be aware of all additional costs beyond the down payment
- Home inspection, mortgage application fees, house appraisal, closing costs, prepaid escrow, etc.
- Our mortgage company also required a rental market appraisal in addition to the standard house appraisal, costing us an extra $50
- Lease details
- Get a signed lease! (our property insurance company required one)
- Agree on the period of the lease, one-year, two-years, five-years, etc.; we opted for an initial two-year term
- Identify rent amounts, due dates, and acceptable forms of payment
- Cover what will happen in the case of late payments
- Review all rights, duties, and responsibilities of each side
- Fair market rental rates and personal income tax implications
- A fair market rental rate must be charged, to offset any rental income with proper expense deductions
- As mentioned above, our mortgage company required a rental appraisal to determine market rental rates and we also scoured Craigslist and Zillow ads for additional info
- The price we set is approximately 10% lower than most comparable properties advertised rate, but within the range noted by the appraiser, albeit the lowest rate. According to my research, this should cover us for taxes.
- Non-homestead property taxes
- It’s only a matter of time before the property taxes increase on the property since it previously classified as a homestead. We advised our renters we may need to adjust the rent to cover the tax increase if our estimate falls short.
- Insurance and liability protection
- Don’t skimp on this, find an agent you trust and cover your assets; consider adding an umbrella policy for further protection
- Repairs, improvements, and utility costs
- Discuss what’s included, who pays, and what is and isn’t allowed
- Brainstorm possible additional expenses upfront to avoid potential issues later
Just prior to the property closing we executed a lease and accepted the first month’s rent payment. Immediately following the closing, we changed the locks on the house and handed keys to our relatives. They began cleaning and moving in that evening.
All went pretty smoothly except for the bees. Upon opening the sliding glass door in the dining room, we disturbed them, lots of them.
We found a nest in the ceiling of the basement right under the sliding door. A small gap in the outside bricks was just enough for them to come in and create some madness. They were safely removed the next day, and the hole plugged.
We’ve now collected two months’ rent (paid on time, wahoo!) and our relatives are settling into the home and neighborhood nicely.
There are a couple of projects to tackle soon – venting the bathroom exhaust fan properly and replacing a leaking pipe – and later the furnace and air conditioning unit, but all in all I think we found a nice property. Here’s to it staying that way.
When You Rent To Relatives…
Maintaining a healthy relationship requires all of you working together.
There are risks with any investment in real estate. When you add the mix of family and renting, you add another layer of complexity you wouldn’t have with strangers.
We are hopeful that taking time up front to clarify expectations on both sides, eliminated questions and potential confusion, setting us up for smoother landlord/tenant interactions in the future.
It’s not always easy to put aside emotions and think all business but to create a win-win scenario for all it’s vital to try.
Ever found something amiss in your new home after the closing or lease signing? Please share in the comments.
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