In most investor’s journeys there comes a time when a friend or family member could potentially become a tenant.
The question, of course, is should they?
There are benefits to having someone you know and trust living in one of your properties, but the line between a personal relationship and a commercial one can be a difficult one to traverse.
So, what are the pros and cons of the strategy?
One of the benefits of having a friend or family member as a tenant is that you understand them better than a tenant who randomly applies for the property.
You might know they are trustworthy, have a good stable job, plus you have probably seen how they live so are confident they will look after your property like it is their own.
On the other hand, though, if they are forever changing jobs, have a habit of running out of money before the end of the month, and have never owned a vacuum cleaner, then it wouldn’t be a smart move to rent your property to them.
The thing is, while blood might be thicker than water, you still need a tenant who will pay the rent on time and who will look after your property.
You should never lower your tenant standards just because you share the same last name as someone or you’ve been friends since you both were in Grade 4.
That’s because the only likely outcome will be a ruined relationship and potentially a ruined property investment, too.
One of the biggest mistakes that investors make when renting to family and friends is to do so under “handshake” provisions.
What that means is that they verbally agree to the conditions, including how and when the rent should be paid, as well as the timing of property inspections — if any are conducted at all.
What usually happens next is that their tenant is always late paying the rent and because they have a personal connection with them, they let it slide… until they can’t meet the mortgage repayments anymore.
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The conversation they’ll need to have with them then is unlikely to improve their relationship and could in fact turn sour very quickly because of the emotional connection they share.
Regardless of whether your tenant is a stranger, your friend Jess from uni or your Great Uncle Bob, you should always have a tenancy agreement that outlines what is expected from both parties.
That way, your tenant knows they are expected to pay on time and that they can’t call you at midnight because they’ve left their house keys at the pub.
Another advantage of renting to family or friends is that it can provide more flexibility for both parties.
Say, your best friend is recently separated from their partner and needs somewhere to stay for a few months and your investment property happens to be vacant.
That is a win-win for both parties as it ensures some rental income is coming in and your friend has a roof over their head.
Likewise, perhaps the reason the property was vacant was that that it needed a little bit of TLC, which you hadn’t got around to undertaking.
Your friend is more likely to be happy for you to complete some simple cosmetic renovations so it’s a nicer place for them — and ultimately for your future tenants — to live in.
Friends or family will also probably be more conscientious with the property by being careful not to damage fittings and fixtures.
At the end of the day, every investor wants a tenant who is going to look after their property as well as pay their rent on time.
If that tenant happens to be a friend or a family member then it could be a worthwhile situation for all concerned.
However, the added emotional connection can make things trickier than needed, especially, if the rules of engagement are not set out — and understood by both parties — at the outset.