I own a 12-unit building in chicago and one of my tenants happens to be a relative that I have been allowing to have an apartment at a reduced rate. The current rents for the building fall between $650-$800 with the exception of my cousin's unit which I'm renting to him for $500 (his lease is for $500). Here's my question. . .
I’ll be having an appraisal done in about 8 weeks and I’d like to know is there any way to set things up so my cousin’s lease reflects at least the minimum value of the other units ($650)? Can I discount his rent by:
1)having him sign a new lease for $650
2)having him pay me $650 for the rent
3)giving him a $150 rebate (out of pocket) keeping his rent at $500
The rent “rebate” or whatever you would call it would not be used as an expense. I’ve been giving him a discount for 4 years so I don’t even consider the $150 lost cashflow anymore.
I would love to hear what some of you think about the scenario above. Is this an OK way to do things or do you have a better option?
I would charge him $650/mn in rent and pay him $150/mn as an on-site property manager which is a perfrectly legitimate and deductible expense. However, do not takle a short-cut: make him pay $650 and write a separate check back for $150.
Greetings,
I am new to this discussion board, but I own a property managment company. I agree 100% with the post by aak5454. I would charge you relative the market rent and then give them a discount for being the onsite residential manager. Because I will give them a discount in rent, I would expect them to handle any minor issues that arise at the property.
Hi, new here also, and will make a new thread about my newly aquired rental soon.
But I was wondering if this theory could be used with a single family rental unit? I was going to get $1250/month, but just found out a relative needs the house. I would only charge them $1000. Can I have a property manager on a one unit rental? Then pay them $250/month? Or does this only work on multi family units?
ummmm, and what would they being doing??? self-management??? I don’t think so (IMHO)… paying for property management and oversight is not a theory; its a legitimate business expense if you chose to incur it. In the orginal example, it was 20% of gross rent; that’s a bit beyond normal and might not hold up under close inspection by the IRS. This is where having an experienced tax professional is invaluable to help you make good decisions about the finer shades of grey in the preparation of your taxes.
in addition to the financial trail, I would also write up a short agreement as well to outline that person’s responsibilities and role.
a word of caution about renting to family and friends. I personally don’t rent to anybody I can’t evict. Landlording boards are littered with stories of deadbeat family members.
Trust me, nobody is more sick about having to rent to a relative than me. And I would actually have them do work for the $250, like painting, hanging blinds, garden work, etc. Not just on paper for show. It may not be a true $250 worth each month, but maybe close, and maybe even more on some months. Since it is still in repair mode, I could have the contractors omit a few final details, (like paint) that she could do. ( And has said would do )
One way for me to look at it, is like this: It’s my first property, so having a relative in there for the beginning could let me work out the kinks, without having to worry about a family’s needs. If anything went wrong, she could always walk down the street and stay with us. ( We’re about 4 houses down the street, and it’s my GF’s sister that will be the tenant.)
Again, thanks for the reply. Any more info would be greatly appreciated.
One point to keep in mind is that when a property owner is ‘paying’ a tenant (family member or otherwise), it creates, in addition to the landlord-tenant relationship, a employer-employee relationship. Here in WA state, we are required to report to Employment & Security (unemployment) and to Labor & Industries (worker’s compensation insurance) total wages, which includes any rent credit, also known as a rent rebate, for ‘work’ performed.
Also keep in mind, sometimes . . . often actually, when there is an injury on the part of the tenant/employee, especially when there is insurance available to the ‘injured’ party, blood and water will flow the same.
My personal policy: never rent to/employ relatives.
He already has his relative in the place so I didn’t give an answer before, but as I have said before my policy is that I don’t do business with anybody I can’t sue. If in the course of business everything taken to its ultimate conclusion could end up in court. If that happens, will it make Christmas, or the next family reunion, or next Sunday in church, or next pool party… difficult? If the answer is yes then I don’t do business with them. That is why I will give them money, or a house, or give advice but I will not employ, or work for, or sell or rent or loan anything to anybody that gets a yes answer to that question.