Property Management Blog

Consider These Risks Before Renting to Family or Friend

Property Management Blog

New investment property owners often must learn things the hard way. One common mistake is deciding to rent your property to friends or family members.

Finding the right tenant seems like a daunting task and some property owners try to cut costs by vetting tenants themselves instead of using a professional property manager. It seems like a good decision, opting for someone you know to rent your property versus a stranger. But there are risks that can affect your tax benefits and profits that a professional property manager can help you avoid.

Before you make the decision to hand over the keys to your rental to a relative or a friend, consider these risks.

Don't lose your investment property tax deductions

A main reason to own an investment property is to earn as much profit as possible. That means ensuring that you pay as little tax as possible that comes out of your profit. A rental property's expenses serve as deductions that can be subtracted from the rental income reported for taxes. The IRS sets rules for investment property deductions, and you can lose deductions if they aren't followed.

For example, if a property owner rents to a relative at less than fair market value, the property may not qualify for deductions because the tax rules say it is considered personal use by the owner. A property must be rented at fair market value and be the renter's main residence to qualify for the deduction.

Don't lose rental income

A big problem that owners who rent to friends or family face is dealing with inevitable tenant problems. It can be difficult to enforce late fees for unpaid rent or rules regarding roommates or other tenant problems that can surface. A friend or relative is more likely to take advantage of an owner by not paying rent, ignoring restrictions against pets or roommates, and even leaving without proper notice.

When this happens, an owner risks losing revenue. A professional property manager would ensure the lease terms are met and be able to enforce the rules, even pursue eviction if necessary. It's an easy way to remove personal feelings from a business transaction.

Don't lose sleep over a bad tenant

While you think you know a friend or relative, chances are you don't know how responsible they are when it comes to paying bills and taking care of property they rent. A property owner tries to screen tenants the best way they know how, but a friend or relative may escape screening because of their close relationship. Then, when you find out they have a history of not paying bills or not taking care of a rental, it's too late.

A professional property manager can handle tenant screening and provide a list of tenant options for an owner. If you want to show your friend or relative you are serious, just point out that they can apply through the management company and meet minimum requirements to ensure you maintain your property's tax deductions and value.

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