Landlords: What are the pitfalls of having family or friends as tenants?

Renting an investment property to family members is common, but it pays to be frank and honest about costs and expectations.
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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.

Landlords are often faced with an awkward decision – whether to rent an investment property to a family member or friend. Is it a good idea or a potential problem?

Andrew King, the president of the New Zealand Property Investors’ Federation, says many landlords avoid it because it can sour relationships.

“There is that potential for disharmony and falling out,” he says. “And it can be long-reaching if it does go bad – it can ruin Christmas forever.”

If you are planning to rent an investment property to family or friends, it pays to spell out who is responsible for garden and lawn maintenance.
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If you are planning to rent an investment property to family or friends, it pays to spell out who is responsible for garden and lawn maintenance.

And it often comes down to expectations. “People live in different ways. As a landlord you might think your family tenants are being disrespectful of your property, but they feel it’s their home, and they may not see it that way,” King says.

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“If you have someone who is not respecting neighbours’ privacy, is having loud parties, or not paying the rent, it can really backfire and ruin the relationship. That’s not to say you shouldn’t do it, but you need to think long and hard about it.”

WHAT ABOUT DISCOUNTS?

There is often an expectation that family members or friends might receive a discount. But there are a couple of points to consider first, including the fact that it could affect your tax return.

This is what Inland Revenue says: “If you rent your property out for less than its true rental value, for example, to a relative or friend at mates’ rates, and you still make a profit from it, the profit is taxable as part of your income. But if you make a loss in this situation, because the expenses of the property 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 be costing you,” he says.

“On the other hand, if you have owned the property for a long time, you may not be so concerned. It also depends on how long you expect the tenants to stay. A lot of 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 family about the situation. “You can say, ‘I’m going to have to charge you the same rent as anyone else because I can’t afford it otherwise.’ You need to be honest and upfront about the cost and also your expectations, so there are no misunderstandings.

“This should happen with any tenant, but it’s possibly even more important when it’s family.”

It pays to clarify the responsibility for garden and lawn maintenance if applicable, and which 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 let out a property “on the sly”. Keeping it professional with a tenancy agreement makes sense for both parties.

“At least then you are protected by the Residential Tenancy Act and can take problems to the Tenancy Tribunal.”

And Best says it’s not always family members who cause problems – for example, it may well be the flatmates your son or daughter brings into the house.

Of course, renting to family doesn’t mean you can disregard your responsibilities as a landlord, which is why a tenancy agreement is best for the tenant. You cannot get away with substandard accommodation – all the normal rules and obligations apply.

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