Renting your investment property to family

03-Oct-2013

You have a rental property. A member of your family needs somewhere to live. If they were to rent out their property, perhaps at a discounted price, they’ll have a home and you’ll avoid agent’s commissions and the usual pesky tenant problems- it sounds like a match made in heaven.

Rather than assuming nothing will ever go wrong, it’s wise for a landlord in this situation to consider what could and would.

Unfortunately, it’s not always so simple. Firstly there’s the financial aspect to think about. If you charge anything less than market rent, the Australian Taxation Office will only allow a pro-rata claim of expense.

Generally, in a non-common arrangement a deduction for expenses can only be claimed up to the amount of rent received, which can severely limit the allowable deductions. If no rent is being charged, no tax deductions can be made at all.

Then there’s the potential for other problems. Often when a landlord is renting to a family or friend, they’ll relax usual standards and make various concessions. Perhaps this will mean they don’t have a binding lease in place, or a security bond. When the terms of the agreement are not made clear in the beginning, it’s common that both parties will instead make their own assumptions about their responsibilities based on the fact they know each other. Consequently, if things go bad, the situation will often end up far worse then a normal tenant/landlord conflict. And worse, it may jeopardise the personal relationship between the parties.

Rather than assuming nothing will ever go wrong, it’s wise for a landlord in this situation to consider what could and would. How will the inevitable repairs and maintenance be handled? What would they do if the tenant falls behind in their rent? What about if the tenant damages the property? How would the landlord feel about issuing a late notice to their daughter or evicting their uncle?

There’s and old adage that advises to never mix family and finance. While it’s not always true- set up properly and effectively managed, renting to family or friends can and does work out for many landlords- the best way to avoid any of the potential pitfalls is to use a professional managing agent to act as a buffer between the two parties. As well as maintaining the landlord’s investment, a good agent will also provide the best chance of maintaining the personal relationship.