4 Reasons Renting to Friends and Family Can Be a Terrible Idea

There's a lot of mistakes to be made in the rental business, renting to family and friends and people you're too familiar with can be among them if you're not careful. Here are four reasons why it can be a bad idea, and how you can prevent potential headaches if you find yourself in that unavoidable situation.

So you own one (or a few) rental properties, and if you own one long enough you will get the uncomfortable question from a close friend or relative “So, I’m looking for a place to live. Do you have anything open?” While their approach might differ somewhat, it’s not a question of if this will happen, it’s how many mortgage payments you’ll make before this does happen (and honestly, how many times this will happen).  

Short of being a reincarnation of Hannibal Lechter, it’s difficult not to at least try to help out those closest to you, unless of course you plan to eat them. What’s more difficult however, is saying a delicate ‘Thank you, but no’ to that same person that you know is breeding roosters in the basement of their current rental home (for purely medicinal reasons of course). 

1.     It’s not that you can’t keep it separate, it’s because they can’t. Nothing is more frustrating than dealing with someone you know personally that feels as if you’re treating them unfairly in business simply because you’re expecting them to act like a normal customer. You may have no problem emotionally separating family, friends and business, the reality (and thus the problem) is that most people can’t. Somehow even the closest people to you seem to conveniently forget that you still have a mortgage payment to make, repairs to make on the house, not to mention bread and milk to buy for yourself or your own family. Oh, and by the way, those rules you have in place, somehow don’t apply to them either. 

Keep in mind that even though it’s your son, daughter, nephew, or best friend’s adopted dog-walker, you absolutely must enforce all of your rules. That means every single one of them, including, yes (quick, cover the children’s ears), running an application on them ***gasp***. You have to treat them just like any other person that you don’t know. Of course, if you don’t, you have to bring yourself to a mental place where you’re ok to let them live for free and do whatever they want. 

2.     They’re going to want you to give them a deal. Think about it, if you backed your car into a telephone pole, and you know someone that knows how to remove dents, are you more likely to bring your car to a friend that is in the business or to a business you looked up online? All things being equal you’d likely bring your car to your friend, with maybe hopes of getting a little bit of a break on the bill. For most people, it’s natural to think this way, to leverage their network as best they can.  

Personally, I’d rather pay a fair, but full-price, with no expectation for having to make similar concessions in my rental units should the time come. Somehow saving $100 on my dent repair translates into thousands of dollars of lost rent and damages, and somehow, that is supposed to be “equitable”. Another slant on this is that they will “do work” in exchange for rent or the Security Deposit. I have thought this was a terrible idea forever, for many reasons I won’t go into now. Honestly, it’s best to stay out of that barter business altogether. After all, you can’t pay your electric bill with their labor.

3.     The Issue of Paying You, or Paying the Bank. The analogy I have often used is, “Let’s say you only have $500 to pay two bills that have come due. If you owed the bank $500 and you owed your brother $500, who are you most likely to delay making the payment to?” Yes, there are all sorts of partial-payment shenanigans you can do, but unless your brother has a collections guy named Thor who regularly tunes people with a hammer, you’re most likely going to call and ask your brother for a pass so you can pay the Bank. Why? Because the Bank doesn’t care. They will start the collection process and start calling you at all hours, making problems on your credit, as well as charging all sorts of fees and default interest rates. Your sweet old brother most likely isn’t going to cause much in the way of problems while you’re carving the Easter Ham some grumbling that is largely manageable, and honestly, might even forget about it after a while. 

The problem here is a lack of infrastructure (the bank, after all, has a collections department), and again, the inability for someone to separate their emotions from the transaction. Your Niece needs tires for her car? Sorry about the rent. Your Neighbor’s Son got hurt in his last MMA fight and can’t work? Sorry about the rent. Your Nephew’s Girlfriend just had to pay for her cat Mittens’ whisker-ectomy? Yeah, sorry about the rent. Basically, any time your friend or family member has a crisis, somehow that becomes your crisis. The fact is that somehow their problem becomes your problem and that is a BIG problem for your business. 

4.     Things can go REALLY bad. I got a call one day from a man looking for property management for his home. He lived several states away and was allowing his son and daughter-in-law and their two little boys to live in his rental property that was here in my area. He had thought that the house needed a little bit of work, so he sent me there to check things out and see what we could do for him. 

I’ve been in the rental business now for nearly 20 years, so I don’t get surprised by much anymore. This one, well… wow. This five-bedroom home was full. And I mean floor-to-ceiling full. There was nothing immediately recognizable as furniture or any visible section of flooring, I was completely and totally amazed at how much stuff had been abandoned in this house. Not to mention, the place was completely and completely destroyed. Broken windows, stained, and torn carpeting, broken doors and cabinets, all topped off with an overwhelming pet smell. I was tasked to inform “Dad” the condition of the home, and how much I think it would rent for after we did ‘a quick clean-up and paint of the interior’, which is what he assumed was all that was needed.

Personally, had that been my family, I likely would have committed some sort of violent felony. That son and his wife had cost his father at a minimum $20,000 in damages, and that’s not including the amount of back rent that was owed, plus the future rent he would lose just in the time it would take to get the house habitable again. Ultimately, it cost this man the ownership of the house as it ended up going back to the bank. Just imagine that discussion over the Thanksgiving Turkey. 

There’s nothing wrong with wanting to help people, especially people that are closest to you. A lot of these problems go away if you established infrastructure that takes the individual landlord out of any of the day to day operations, or if have a property manager. By having someone that lacks a personal relationship handle your friends and family, issues like running applications, charging late fees, and enforcing rules suddenly become a non-issue for you. 

So if you’re that individual landlord, considering hiring a virtual assistant, attorney, accountant or non-family member that will perform the collections, processing applications, and enforcing the rules. Or if you’re getting to the point where you are ready to focus on growing your real estate investment portfolio instead of managing it, consider hiring a property manager. Whatever direction you choose, when those friends and family come calling, just be sure you have the discipline to stay out of the way, and let them do their job.