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.
The House
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
The mortgage:
- 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
Moving In
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.
Never miss a post, the latest happenings around here, new healthy recipes or resources ~ Follow us below!
Emily Jividen says
I think it was probably a good idea to have a rental management company in this case, since that creates a buffer and more business-like relationship between you and your renting relatives.
One note on the insurance for those who are setting up a rental for the first time: you’ll need special insurance for the rental, not just regular homeowner’s. And it’s a bit more expensive than what you’d pay if you lived there. You might also consider umbrella liability coverage for yourselves, especially if you have more than one rental.
Amy says
Thanks for the recommendations, Emily! We do in fact have an umbrella policy and I’ve updated the post to mention that.
makingyourmoneymatter says
I’m glad it’s working out so well so far! I swear I’ll never buy more rental properties, but maybe if someone in my family needed the help that would change my mind.
Amy says
Thanks Kathryn. Depends on the circumstances right? Sometimes bad luck happens to good people and they need a bit of help.
I’m glad we were able to do something for our relatives. Hopefully, it continues to be a win-win!
TheRetirementManifesto says
Amy, good for you for showing folks “the right way” to work with family. Sounds like it’s gotten off to a great start (save for the bees, of course!), hope it continues to go well for you. A co-worker bought a house for his Mom (she rents from him), and it’s working out well for him, too. Keep us posted!
Amy says
Good to hear it is working out well for your co-worker too. Thanks for the kind words Fritz. See you in Dallas soon!
Vicki@MakeSmarterDecisions says
Sounds like a good rental and it makes sense that you might be able to use it down the road too. We just closed on the sale of our house today – hopefully the new owner won’t have any of those problems that you describe! But things can definitely happen! Looking forward to seeing you in another week!
Amy says
Woohoo, congrats to you! Yes, see you soon in Dallas. Safe travels!
Dave says
Renting to relatives can be a tricky situation. My in-laws own a few properties. They rented to a niece and her boyfriend. They decided to open a dog grooming business in this apartment. Needless to say, this led to a big issue. My in-laws told them to stop growing dogs. They stopped and moved out. They are no longer on speaking terms because of this situation.
Amy says
Oooh, sorry to hear they had such an unfortunate situation arise, Dave. I expect things won’t go perfectly, but I pray it won’t ever come to a division in the family. Hopefully, your niece and in-laws can get past this. Thanks for sharing.
Cubert says
Excellent work! Funny enough, we got the same rate of 4.75% for our recent airbnb condo purchase. Looks like you’re taking into consideration all of the important things with lease and insurance, etc. I would consider forming an LLC for further liability protection (plus there’s some tax advantages too I think – check with your accountant!)
Amy says
Thanks Cubert! The 4.75% seems high compared to our 2.75% on our primary home but it sure beats the 8% and higher rates from not so long ago. Thanks for the info!
Xyz from Our Financial Path says
We are renting our to a relative too and did not have any issues yet. We signed a lease and everything, just as it was a normal tenant. Good Luck.
Amy says
Good to hear Xyx, I hope it continues that way for you. Thanks!
Gabe at The Shiny Dollar says
Thankfully ive had great luck renting to my brother. He is giving me more than my old tenant, and has always paid on time. If anything ever breaks, he will be there to handle the person going to fix it as his job is more flexible. Its beeb over a year and so far no problems!
I mean I probably wouldn’t rent out to just any family member…but I knew he was responsible.
Amy says
That’s great it’s working out well with your brother, Gabe. There are definitely some benefits in renting to family or someone you know. Hopefully, it stays good for you and us too. Thanks for stopping by and commenting!
Lily @ The Frugal Gene says
I would prefer a family member to stay than any tenant. That doesn’t mean I’ll skip any of the legal work – their lack of paperwork is what makes something ugly.
Amy says
Makes sense to me Lily! There might be a few relatives I wouldn’t rent to though 😉
Laurie@ThreeYear says
Amy, we actually rented to relatives as well. It turned out fine, but it was good that they were distant relatives (my sister-in-law’s brother). It was also our apartment in Chile so there was the buffer of a continent. At first, there was a problem with the rent being paid on time, and I got really nervous about that, but we were very firm and it worked out. We also had a flooding problem while they lived there–the apartment above them flooded and it leaked down, meaning we had to replace all the floors. They were really patient about it (of course we gave them a discount on the rent). For us, it was a good situation, but it’s definitely good to have safeguards in place like a rental management company (we had my brother-in-law act in that capacity).
Amy says
I’m glad to hear it ended up being a good situation even with a couple of issues. Replacing floors from another continent had to be fun. Thanks for sharing, Laurie!