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Renting an investment property to family members is common, but it pays to be frank and honest about costs and expectations.
Homeowners are often faced with an awkward decision: renting an investment property to a family member or friend. Is it a good idea or a potential problem?
Andrew King, president of the New Zealand Federation of Real Estate Investors, says many homeowners avoid it because it can damage relationships.
“There is that potential for disharmony and fighting,” he says. “And it can be far-reaching if it goes bad, it can ruin Christmas forever.”
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If you plan to rent an investment property to family or friends, it is worth explaining who is responsible for the maintenance of the garden and lawn.
And it often comes down to expectations. “People live in different ways. As a homeowner, you might think that your family’s tenants are being disrespectful to your property, but they feel like it’s their home and they may not see it that way.
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“If you have someone who is not respecting the privacy of the neighbors, is having noisy parties or is not paying the rent, it can backfire and ruin the relationship. That doesn’t mean you shouldn’t do it, but you should think about it carefully. “
AND THE DISCOUNTS?
There is often an expectation that family or friends may receive a discount. But there are a couple of points to consider first, including the fact that it could affect your tax return.
Here’s what Inland Revenue says: “If you rent your property for less than its actual rental value, for example, to a relative or friend at your roommate’s rates, and you still make a profit from it, the profit is subject to taxes as part of your income. But if you suffer a loss in this situation, because the property’s expenses are more than the reduced rental income, you generally won’t be able to deduct expenses more than the amount of income you received. “
King notes that in the early days of owning a rental property, it is very common for investors to have to top up rental income, because the costs and expenses of maintaining a property are higher than the money received.
“A family member might well expect a discount, but it will cost you,” he says.
“On the other hand, if you’ve owned the property for a long time, you may not be so worried. It also depends on how long you expect the tenants to stay. Many landlords will give below market rent to long-term tenants (not necessarily family or friends) because it is good for their business to have that stability. “
King says the best policy is to be open and frank with the family about the situation. “You can say: ‘I’m going to have to charge you the same rent as anyone else, because otherwise I can’t pay it.’ You need to be honest and straightforward about the cost and also about your expectations, so there are no misunderstandings.
“This should happen with any tenant, but it is possibly even more important when it comes to family.”
It is worth clarifying the responsibility for the maintenance of the garden and lawn, if any, and what costs will be borne by the tenant and which will be covered by the landlord.
Peter Best, director of Ray White Best Property Management, advises against trying to rent a property “on the sly”. Keeping it professional with a lease makes sense for both parties.
“At least then you are protected by the Residential Leasing Law and you can take the issues to the Lease Court.”
And Best says it’s not always family members who cause problems; For example, they may be the roommates that your son or daughter brings home.
Of course, renting to the family does not mean that you can ignore your responsibilities as a landlord, which is why a lease is best for the tenant. You can’t get away with poor accommodation – all normal rules and obligations apply.
