You'll often hear that it's a bad idea to mix business with pleasure -- and that can, to some degree, extend to renting your property to friends. If you own a rental property and are looking for a tenant, you may be inclined to have family or friends of yours sign a lease agreement. But before you do, consider the benefits and drawbacks of this real estate decision.
Benefits of renting to friends
As a landlord, your goal is to secure a steady stream of rental income, and renting to friends can be a good way to achieve that. If you enter into a lease agreement with friends, they may be more likely than a random tenant to keep up their end of the bargain by paying rent and covering expenses on time and in full.
Also, friends are more likely to treat your property with respect than random tenants. And, they will likely be more flexible with regard to things like allowing you access to the house or apartment in question.
Risks of renting to friends
On the other hand, renting to friends is a move that could backfire. For one thing, a friend might take certain liberties because of your relationship, which could include being late with rent payments consistently. That, in turn, could mess up your cash flow.
Furthermore, while you'd think a friend would be more likely to take good care of your home than a random tenant or roommate, that may not be the case. And if that happens, you may find that you have a harder time withholding that friend's security deposit.
And let's not gloss over the potential to wreck an otherwise solid relationship because of that rental arrangement. If you have a tenant who's late paying rent, who treats your property manager poorly, and who violates certain lease terms (say, by being loud during designated quiet hours in your building), you likely won't have a problem putting that tenant in his/her place.
But when you're renting to friends and need to enforce certain rules, things could get tricky. Friends could get offended that they aren't being given more leeway to come up with rent or receiving special treatment with regard to building rules. Or, you could get offended that your friends are taking those liberties. The result? A friendship that ceases to be.
Finally, your friends might overstep their boundaries as tenants when you're the landlord. Imagine your friends' shower stops draining, rendering it unusable. The last thing you want is for your friends to feel comfortable calling you at 2 a.m. to run over and fix it when under a normal rental arrangement, it would have to wait until morning.
Best practices for renting to friends
Despite the potential for many things to go wrong, renting to friends isn't always a bad idea. It can, in fact, be a very good idea, provided you go about it the right away. If you're going to rent to friends, be sure to follow these important ground rules:
1. Treat your friends like every other tenant
Make it clear to your friends that they will be expected to follow the same rules as every other person you rent to. This is an especially important thing to enforce if you own a multifamily home or apartment building. Explain that your friends will be required to stick to noise-related regulations, pay rent on time, and wait in line if their unit needs repairs. That way, you're less likely to get taken advantage of or encounter a scenario where your relationship gets strained.
2. Have your friends sign a lease agreement
You wouldn't rent to a stranger without locking that person into an official lease, would you? Well, the same should hold true if you're renting to friends. Present a formal lease that dictates the terms of your arrangement, including when rent is due, what rules and responsibilities your friends have as tenants, and what obligations you have as a landlord. Remember, leases aren't one-sided; they serve the important purpose of protecting tenants, too, so your friends deserve to have one in place as much as you do.
3. Make sure your friends are financially responsible enough to rent from you
In the course of vetting tenants, there's no doubt a process you go through. That process likely includes doing a credit check to ensure that each tenant is trustworthy, as well as income verification to ensure that each tenant has the means of keeping up with their rent.
The same should hold true when you're renting a house or apartment to friends. You might know who your friends' favorite sports teams are and be able to identify their favorite restaurants, but you may not know how much money your friends have in savings, what their income looks like, and whether they have a ton of credit card debt. By running a credit check, you'll spot any financial red flags that indicate that your friends are not good candidates for one of your rental units.
Letting friends down easy
What happens if you have friends who want to rent from you, and you determine that it's not a good idea, whether because there's something about their financial circumstances you're not happy with or you're just not comfortable with the idea as a whole?
Your best bet in that situation is to be honest. If money is the issue, explain that while you'd like to help out by putting a roof over their heads, rental income is your bread and butter, and you can't risk a scenario where you're short financially because you rented to the wrong people.
You can also emphasize how much you value your friendship and that you wouldn't want to compromise it by entering into a financial agreement -- one that you're in the position to have to enforce. With any luck, your friend will understand -- and maybe even agree that signing up to have you as a landlord is a bad idea.
The bottom line on renting to friends
Renting to friends could very well work out for you -- or not. If you're not comfortable taking that chance, don't do it. And if you do decide to move forward, proceed with caution and have an airtight lease agreement so that everyone involved is protected.
Better Returns - half the volatility. Join Mogul Today
Whether over the 21st century, the past 50 years... Or all the way back to more than 100 years... Real estate returns exceed stocks with SIGNIFICANTLY less volatility! In fact, since the early 1970's real estate has beat the stock market nearly 2:1.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. With volatility spiking, Mogul members have been receiving investing alerts with projected rates of return of 16.1%, 19.4%, even 23.9%, and cash yields of up to 12%! And these aren't in some 'moonshot' penny stocks or biotechs, but more stable multi-year real estate developments that don't see their value swing on a daily basis like the stock market.