Thinking about renting a place to your cousin Bobby or your Aunt Sally?
Not a great idea.
Renting out a property to a family member or a friend can be a risky business. That’s our professional opinion. We’ve seen what can happen, and it isn’t pretty. Usually, it’s the property owner that’s left cleaning up a big mess, losing money, or recovering from a huge family fight.
As property managers in Portland, we generally don’t recommend renting to relatives. To answer the question in the title of this blog, NO. It’s NOT a good idea.
Here’s what happens: lines can get blurred between the personal and the professional, and it can be difficult to set boundaries with someone you see on holidays. Whether it’s a relative you’re close to or someone you’re related to distantly, things can get weird when you’re running a credit report on them or asking them to please pay their late rent. Things will get even weirder if you avoid pulling the credit report or screening the tenant and you shrug off the late rent payment.
The important thing to remember is this: you’re running a business. And, you need to protect yourself as well as the business. That’s hard to do when you’re renting to relatives.
We don’t like it, but we also know it happens from time to time for whatever reason.
Here’s our best advice: If you’re going to allow a family member or a friend to move into your rental property, make sure you’re working with a Portland property management company. Professional management is always a benefit to landlords, but in a situation like this, it’s absolutely essential. You’ll need an objective party managing the day-to-day business so you don’t have to.
Charging Market Rents
The rents you can earn on your Portland rental property are high. They’ve risen over the years, even with rent stabilization laws in place, thanks to the demand and the high costs of inflation. The higher rents will help you earn more on your rental property, but when you rent to relatives, you may feel pressured to give them a good deal.
That’s a tough sacrifice to make when you’re renting out property in a thriving rental market, where you should be earning higher rents.
Don’t underprice your home when you rent to a relative. You’ll never get that family member out of your property when they get comfortable paying your lower-than-market rents.
There’s a legal reason not to drop the rent too low when you have relatives living in a home you own. There are tax deductions you get to take when you rent out a property. Too much of a discount on rent will make the IRS think of it as personal property rather than a rental unit. That’s going to disrupt your deductions and throw off the structure of your rental business.
Talk to a CPA before you rent to relatives.
Setting Consistent Standards
Charge your relatives the market rent. This is part of being consistent with your rental property. When you’re running a rental business, you’re subject to all housing laws, including fair housing laws. Treating your tenant who happens to be a relative differently than you treat other tenants will be potentially risky from a legal standpoint. You’ll want to:
Screen tenants, even if they’re tenants you know
Collect a security deposit
Charge market rents
Enforce a strict rent collection policy.
If you’re not doing these things for every tenant, then you’re not running a rental business.
Can You Dig through Your Relative’s Rental History?
When you rent to relatives, you have to conduct a screening process that’s as rigorous as your screening process for every other applicant. That means you’ll have access to your family member’s credit score, income records, and rental history. Are you comfortable with this? Are they?
You need to screen, even if this is someone you have known your whole life. How will you handle their prior bankruptcies and evictions? What if their credit is abysmal?
As you know, a successful screening process includes the following:
A credit check.
An eviction check.
Verification of income and employment.
Reference checks with past landlords.
It’s not an option to avoid screening. You have to know that your tenant is a good risk, even if it’s a tenant that you know. Talk to your family member and let them know that the screening process is required for everyone. They’ll have to fill out an application and consent to a background check.
Better yet - hand this task over to a Portland property manager so you don’t have to deal with it at all.
How Will You Handle Late Rent and Lease Violations?
You have to hold your relations accountable, just like you have to hold all of your tenants accountable to the lease agreement. If you don’t allow pets, don’t let your family members bring pets into your property. If you don’t allow smoking, send them a lease violation letter if you detect smoking at the property.
If you’re thinking you don’t need a lease agreement when you’re renting to a relative, you’re wrong. That would be a big mistake.
You need to have a lease agreement in place, no matter who you’re renting to. Just like any lease you’d sign with tenants, it needs to be legally enforceable in Oregon, and it also needs to comply with all of Oregon’s rental laws. The lease agreement you sign with your friend or family member must include:
Your rent collection policy, including how much rent is due, when it should be paid, and how it should be paid. Include information on grace periods as well as late fees and other consequences.
The process for letting you or your property manager know about a repair need. Maintenance requests need to be made promptly, to avoid any expensive deferred or unreported maintenance.
Pet policy information. If you’re allowing pets, charge your friend or relative a pet fee and pet rent just like you would with any tenant. You’re still protecting your property from the potential damage and risk that comes with pets.
Rules and requirements. Address smoking, guests, prohibitions against changing the property, and any HOA regulations and rules if your property is in an HOA.
Note the security deposit that was collected and the things your tenant will have to do to get the deposit back.
The terms of the lease agreement. It cannot be open-ended. When does the lease start and end?
A big fight with a family member isn’t fun for everyone. But, you have to protect your investment. Make sure you’re prepared for this potential problem.
Or, partner with a property manager.
Portland Property Managers Protect Your Investment
You can rent a property to a relative without being their landlord. All you have to do is hire a Portland property management company. When property managers are responsible for the leasing, management, and maintenance of your investment property, you don’t have to worry about allowing your rental to become a source of stress for you. The business of your investment is continuing to operate as it should.
Property management allows you to set boundaries. We are the boundary. When we are working on your behalf, you don’t have to discuss rent, maintenance, or what’s going to happen at the end of the lease term. All of that is between your tenant and your property manager.
Even with a property manager in place, your relative will know how to get in touch with you and where to find you. Always keep the boundaries you’ve created with your property management partner. Don’t be afraid to refer all questions and conversations back to your property manager. Keep yourself completely out of it, as difficult as you may find it. This is better for you, your property, and ultimately, your tenant.
This is an important buffer to have between you and your tenants. You won’t have to worry about hurting anyone’s feelings or hurting the profitability of your rental property. It also keeps you compliant with all fair housing and other rental laws. You can easily get distracted by what you’re responsible for when you’re renting to people you love.
We will re-state the case we made earlier in this blog: renting to relatives is not a great idea. Especially now, when rents are so high and there are plenty of well-qualified applicants willing to rent your home. But, we’re realists. If renting to an otherwise homeless family member is inevitable, make sure you get protection and good advice from a Portland property manager.
If there is no avoiding the scenario where you have a relative living in one of your rental properties, make sure you consult with us. We can make this a lot less risky for you. Contact our team at PropM, Inc. We are here for you 365 days a year and seven days a week.
