Renting investment property to family members may sound like an ideal way to help loved ones while generating passive income. However, before you hand over the keys, it’s important to understand the legal, financial, and emotional implications of renting to family.
In this blog, we’ll explore some things to consider ensuring the arrangement benefits both you and your family while keeping your investment on track.
1. Is renting to family legal?
The simple answer is yes—you can rent to your family. However, just because you’re renting to someone you know doesn’t mean any of the rules change.
Whether you're renting to a parent, sibling, or child, it’s important to have a formal written tenancy agreement. Verbal agreements can lead to misunderstandings, so make sure the lease clearly outlines important details such as the rent amount, payment due dates, maintenance responsibilities, and any rules regarding the use of the property.
While the Residential Tenancies Act (RTA) doesn’t typically apply to family members, a landlord can choose to have the agreement fall under the RTA by “contracting in.” This means that both the landlord and family members must agree in writing to be covered by the Act. The agreement should specify how everyone will “contract in.”
It’s also a good idea for all parties involved to keep a copy of the signed agreement for reference.
2. Financial considerations
A common temptation when renting to family is offering your property at ‘mate’s rates’. While you may want to help someone get on their feet, it’s important to weigh the financial impact on your investment.
If the owner makes a net ‘profit’ from the property at the end of the year, the profit is taxable as part of the owner’s income. In this event, there will be some tax to pay to the IRD the following year.
However, if the owner makes a net ‘loss’ in this situation (because the expenses of the property are more than the reduced rent), the owner won’t generally be able to offset the loss against their other income for tax purposes. So, let’s say you are charging 80% of the market rent, then you would only be entitled to claim 80% of the expenses.
The best approach when renting to family members is to obtain a free ‘market rent appraisal’. This can easily be done with a call to your property manager, who’s experienced in this field.
3. Setting boundaries
Renting to family can add a layer of complexity. What seems like an easy arrangement could lead to tension if there are issues with rent payments, property damage, or disagreements. It’s essential to manage the landlord-tenant relationship professionally, even though you're renting to someone you may know well.
Maintaining a formal, business-like approach can help avoid potential conflicts and preserve your personal relationship.
4. Is renting to family a good idea?
The rental market in your area plays a key role in whether renting to family is the best option for you. If you’re in a high-demand market, offering a family member a discounted rent could reduce your potential earnings. Conversely, if the market is slow, renting to family members could be a practical way to keep your property tenanted.
Renting to family members can offer some advantages. For one, it provides peace of mind knowing that someone you trust is taking care of your property. Additionally, renting to family can create an opportunity to help them get settled, save money, or improve their own financial situation.
Renting to family can also create long-term stability. You may have fewer concerns about property upkeep, and you might be more flexible with them if they face financial difficulties, which could help maintain a positive relationship.
5. What to consider
Before moving forward with renting to a family member, ask yourself these critical questions:
- How will this affect your relationship? Renting to family could change the dynamic of your relationship, so think about potential risks.
- Are you ready for the responsibilities? You’ll need to manage the property and address any concerns, even though it’s family.
- Is this financially smart? Consider how renting to family members affects your bottom line and tax obligations.
6. Is it right for you?
In conclusion, renting investment property to family members is not only possible, but it can also offer benefits such as peace of mind and financial flexibility. However, it requires careful planning and consideration of the legal, financial, and emotional factors involved. By treating the rental situation with professionalism, maintaining clear communication, and following all legal and tax requirements, you can navigate the potential challenges and make renting to family a positive experience for everyone involved.
