How to Successfully Rent Your Investment Property to Family or Friends

So you have an investment property to rent out and know someone close to you looking for a place to stay. It seems like a no-brainer; you have a lot of trust and respect for them, and you won’t have to host interviews or screenings for potential tenants.

But while it might sound like an ideal solution, there is a myriad of things that could go wrong – the worst and most likely being a relationship break down. You’ve probably heard the horror stories of tenant-landlord relationships going pear-shaped, especially if they’re friends or family.

However, like anything, you can put measures in place to avoid making mistakes that may harm your investment or relationship. Keeping the interaction between landlord and tenant as professional as possible is the best way to keep business separate from personal.

Renting to people you know can be successful, you just have to take your role as a landlord seriously, understand the risks and know how to avoid them.

Implement a formal tenancy agreement

Before your tenant moves in, it’s best if both parties sign a tenancy agreement that clearly states the responsibilities of the landlord and tenant.

Ryan McLean from Positive Cash Flow Australia said ‘whether you’re the renter or the owner, rental agreements are crucial because they help to protect both parties.’

Having an honest, straightforward and binding agreement from the beginning allows both parties to understand their roles and will help to resolve disputes that may arise in the future.

Get yourself a property manager

While in some cases you may want to manage your investment property, when you decide to rent to someone you know, it’s important to keep business dealings separate from your personal relationship.

Rental managers are great in this sense, as they’ll be your tenants’ sole point of contact if anything goes wrong. They’ll keep you updated on any maintenance issues, locate late rent and professionally manage your property to ensure your role as a landlord, as well as your personal relationship with the tenant, is kept intact.

Property managers usually take 6 – 8% of your rental yield, which is not a lot compared to awkward dealings with a friend or family member.

Be strict on rent

Although it may be tempting to offer your tenant a discount rent, it's important to remember your financial obligations.

According to Terri Scheer Insurance, ‘it’s important to ensure your investment property remains a profitable asset and provides you with a steady flow of rental income.’

It's helpful to note that if you charge anything less than the market rent, the Australian Tax Office will only allow a pro-rata claim of expense. Deductions can usually only be claimed up to the amount of the rent received. If you are significantly reducing your rent for a family member or friend, you are essentially limiting your allowable tax deductions.

Invest in landlord insurance

Getting yourself some landlord insurance can do you a world of good. It protects your property from malicious or accidental damage, legal liability, and loss of rental income. 

No matter how much trust or faith you have in your tenants, accidents do occur, and without insurance to protect your property, you may be up for a significant expense that can leave you out of pocket. Investing in landlord insurance gives you some peace of mind if an unforeseen circumstance arises in the future.

At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. To speak with one of our brokers about anything mortgage-related, give us a call on (08) 9417 3399!