I have a property management agreement with a property management company; my friends want to live in my house, and they said I should pay the 10% monthly management fee and 50% lease fee, but my friends have never signed a lease or submitted an application to the property management company. They have only asked my permission live in the house. Should I pay the property management company’s fee? My friends will sign a lease and pay me rent to me personally.
You want my opinion? Bad idea jeans!
Renting to friends is usually a terrible idea for a few reasons:
1. If your friends have to rent from you, that tells me there’s a good chance they couldn’t qualify somewhere else. How much do you really know about their credit history? People mask this a lot. Have you pulled a bureau on them? (If you haven’t already, it may be too late – you need their written authorization to check their credit.
2. Familiarity breeds contempt. You have a lot invested in your rental property. It’s an important financial asset – but you have gotten buddy-buddy with your tenants. Chances are very good that they will, sooner or later, take advantage of you or test your limits.
3. You may be hesitant to evict when you need to. Evicting is a hard thing to do, even for landlords who aren’t close personal friends with their tenants. Friendship is fine – but when the rent is late, are you willing to pull the trigger and evict? When push comes to shove, are you going to be a buddy, or a landlord? Be honest – can you afford to be a buddy when so much money is at stake?
4. Are you willing to send them a formal notice if they aren’t taking care of the property? If they are causing noise problems? If their trash is out on the balcony, creating an eyesore?
5. Are you willing to mess up the next landlord by providing your friend with a good recommendation even though she was a nightmare tenant?
This is why I almost always never advise renting to friends or family. You can be a great landlord, or a great friend or family member. But it is exceedingly difficult to be both to the same person.
What’s that, you say? You’ve known your friends for years and they wouldn’t do that to you? Believe me, you wouldn’t be the first landlord to make that assessment – and yet landlords find themselves regretting the decision to rent to friends every day.
You aren’t special.
Furthermore, even assuming the best of intentions and the finest character on the part of your friends, you have to remember that their ability to provide you with timely rent payments isn’t always fully under their control. Life happens to all of us. People lose jobs. They get sick. Roommates move out unexpectedly, leaving their other roomies stuck with their share of rent and utilities.
You should be willing to evict even in these circumstances. Indeed, you must be perceived as willing to evict – or you increase the chances that you will have a problem.
My advice now, though, since they’re already in, is this: Meet with them and explain to them that you love them, but you have to treat them like any other tenant when it comes to business.
Be firm on this, and head any trouble off at the pass. Be clear that you must enforce the terms of the lease impartially, and that you have a system in place. Specifically state that if it comes to an eviction, you will have no choice but to execute.
It’s not that you don’t love your friends – you are simply not in a position to afford a non-performing real estate asset. This is money you rely on to live on and maintain the property for everyone else.
The one exception: If a friend needs to get out of the lease because he or she just can’t afford it, make it easy for that person to get out. It’s better to let them walk away and re-rent than it is to hold someone to an agreement he or she cannot honor.
Should you pay your property management firm?
That depends on your contract with the firm. What was the scope of the engagement? Do you plan on having them continue to oversee the property for the purposes of maintenance, security, administration and rent collection?
Do you, personally, want to be the person tracking down your friends for money every month?
If the answer is yes, and you don’t need the property management firm to do anything else, then it’s probably time to end the business relationship.
Any standard property management agreement will have a section on what happens if one party wants to terminate the contract before the agreed upon period is up. You may have to pay a severance fee. You don’t get value for this – it’s one more reason why renting to friends and family can be problematic.
Why having a property manager when renting to friends can be a plus:
I don’t know the details, but if your property management firm is a good one, I’d consider keeping them on. They’ll handle rent collections, late fees and all the other issues. They can be the ‘bad cop.’ Simply direct your friends to deal with the property manager, if there are any issues. And let the property management firm earn their fee.
This can be a good option if you do decide to continue to rent to your friends – you won’t be in stuck in the middle between your business and your personal friendships.
You and your friends could agree that all property-related communications will occur through the property manager. That takes a big chunk of the personal aspect out of the equation. The more invisible you are as a landlord, the better.
One final point: Always have a lease in place. I don’t care if the tenant is your own mother: Have a written lease in place. Let the lease bear the burden of any discord. If there’s a disagreement among friends, just say, “Well, let’s look at the lease.” If you have to get mad, or if they have to get mad, get mad at the lease. Not at each other.
Of course, if it were that easy, everyone would be doing it.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.