If you've got a property you're looking to lease out, you might be apprehensive about handing it over to strangers for a year. Renting to someone you know, whether it be a close friend or family member, can seem a much better alternative.

While this often works out great, it isn't risk free. Here's what you need to know before renting your property to someone you know.

Renting to family members

There's nothing in Australian law that prohibits renting out your investment property to family members or close friends. Just like a normal tenancy agreement, you and the person/s you're renting to agree they can live in the property for a period of time, ideally also backed up by a formal document.

Though it may seem a more casual arrangement, both you and your tenants have all the same rights as you each would under a normal tenancy in your state.

For example, you might be close enough with who you're renting to for it not to be a problem if you're dropping by the property all the time. However, you technically still have to give adequate notice before you visit, per tenancy laws in your state. You'll also still need to make sure the property is in an acceptable condition and abide by all of your other obligations as a landlord.

Should you offer discounted rent?

If you're renting to a family member, you might want to give them a bargain on rent. Obviously this is entirely up to you - for example, you might drop the rent charged to your children or a relative in need. The major thing to consider when contemplating discounting the rent is the opportunity cost. That is, how much you're missing out on by not renting your property out at market rate, and what you would otherwise do with that money. Even, say, $100 a week, can seriously add up over time, so it's worth crunching the numbers to make sure you fully understand the consequences of the decision you're making.

Common mistakes when renting to family members

Not having a property manager and skipping inspections

It's generally a mistake to assume that, since you're renting to someone you know, you won't need a property manager. You still have all normal landlord responsibilities, so if you aren't able to organise quick repairs when things go wrong, you probably still need a property manager to take care of it for you.

You might also decide you trust the person/people you're renting to to not damage the property or notify you immediately if something happens, negating the need for inspections. Even in such cases, inspections can still be worthwhile - you or your property manager might find an issue the tenants don't consider to be a problem. You might find mould somewhere they haven't noticed, for example, or scratches on the floorboards they don't realise have happened. It can be especially handy to have a property manager as a conduit in these situations so these things can be addressed without damaging your relationship with the tenants.

Not having a formal tenancy agreement

A formal tenancy agreement protects your tenants as well as you. The family member or friend you're renting to knows that if you decide you'd like to move into or sell your rental property, you won't just kick them out. It's a sensible idea to have something, signed by both parties, to refer to just in case, even if it's a more informal document than usual.

Being lenient on rent arrears

This is a bit of a tricky one and probably also depends on your relationship with the tenants. You might have more patience if your children are late with the rent than if your third cousin twice removed was to miss their due date. At the end of the day, your property is likely still an investment that you want to do as well as possible. You'll presumably have ongoing expenses associated with the property, so late rent could potentially leave you short. If you're in a financial position to do so and you're okay with giving your tenants some wiggle room, that's not a problem. But if the late rent is affecting you, you mightn't be able to afford to be polite. It can be helpful to have a property manager who can deal with the tenants on your behalf in these situations.

No landlord insurance

Compromising on landlord insurance because you know the tenants is a bit like not getting travel insurance because you plan on being responsible. - even with the best of intentions, stuff can happen inadvertently. For example, your tenants might buy a second hand washing machine that ends up causing major water damage.

In such a scenario, your tenants are likely to be pretty grateful for your landlord insurance policy that means they aren't hit with the bill themselves.

Landlord insurance will also cover you if your tenants get sick or other circumstances mean they're suddenly unable to pay the rent.

Frequently asked questions about renting to friends or family

Can you lend property owned by your SMSF to family members?

If you own your investment property through your self managed super fund (SMSF), there're rules regarding whether you can rent it out to a relative or friend. Doing so would make the property an 'in house' asset, as it's leased to a 'related party'. In house assets can't equal more than 5% of your funds total assets, so you'd need a hefty balance for a property to be less than 5%.

Do you need to declare rent on your tax return if it's below market value?

All rental income is assessable income, even if you're charging below market rates. Therefore any amount of money you receive from your investment property needs to be reported to the ATO, regardless of circumstance.

Collections: