Profile picture for user7816242

Is renting our house to friends for a couple years (while we will be in another state) a good idea?

My husband and I will have owned our house in Indianapolis, IN for three years April 2013. We have to live in the home until at least April due to the $8k first-time homebuyer credit. We are planning to travel to Colorado after April and are trying to decide what to do with the house. We purchased the home for $132k and are paying a little more than $1k/month for our mortgage. It is a really nice tri-level in a great neighborhood and the city is in the process of putting in septic systems. From what I've been told, that will increase the value of the home significantly.

As I see it, our two options are: sell the home or rent it to a third party. We have found a family who would like to take over the home as early as next month. Here are my questions:


1. Could we rent part of the home and still live in part of it until April to avoid losing the homebuyer credit?

2. Would it be worth it to refinance if we are planning to sell the home in 2-3 years?

3. If the family signs a contract that I write, how binding is that contract?

4. What provisions could I NOT include in that contract?

5. What are the inherent risks I should consider?


Thank you so much for your help!

  • November 16 2012 - Indianapolis
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Answers (8)

There isn't an inherent issue with working with your friend as long as you do lay everything out ahead of time!

Get all the contracts and forms signed just like you would with anyone else. Most of this can be attained by working with a local real estate professional. Even if you aren't working with a REALTOR® consult with a lawyer about making sure everything is properly stated.

Let me know if you have other specific questions!

Best!
  • November 16 2012
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Profile picture for dzembala1
 In general, renting to a family or friend isn't a bad option.  Someone you can trust to pay the rent on time and keep the place in order is always a good plan.  I would also take a look at how much the house is currently worth and then decide if you are willing to sell it at that price.  If not, waiting a few years may increase your profitability.  In terms of a refinance, check to see how much you can save, if its a couple hundred bucks, the cash flow may be worth it if you decide to hold onto it for a few years.  Best of luck!
  • November 16 2012
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Profile picture for user7816242

Good advice! You are right... I will probably sell since I think we stand to possibly make a profit. How early can/should you put a house on the market if I want the closing date to be in April?

  • November 16 2012
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Profile picture for wetdawgs
"Just wondering if there is anything I CAN'T write into a contract." Yes, there are many things you can't write in a contract, for example, you can't have things in the contract that violate state and federal laws.    You are asking legal advice, and that can't be offered in a forum such as this.  Please see an attorney!

Yes, you can sell from 1000+ miles away, but may require some trips to the location to get the property ready and interview agents.

I'd rent a storage locker for the car and tools, and sell the property now.   It is very possible to destroy any two year equity gain by renter damage plus costs of selling from a distance (extra trips, lodging while there to repair the place, time off work etc).

  • November 16 2012
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Profile picture for user7816242

My retired parents live near the home, so ideally they would be able to keep an eye on things. I understand the part about friends taking advantage... but I'm not afraid to lay down the law if need be!

Could I possibly write a clause into the lease making them responsible for any damages and requiring rent in advance or they have to move out in X months? Just wondering if there is anything I CAN'T write into a contract.

I'm not as worried about making money as I am keeping the garage for storage of my husband's car and tools (we will be living in a camper when we go to Colorado). I'm also considering that it would be beneficial to keep the house for the equity and such.

Also, selling the property from 1000 miles away is a hassle, but it is possible? Especially if I have my parents nearby who could potentially help with anything that requires a physical presense?

This is VERY helpful. Thank you all SO MUCH!

  • November 16 2012
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The big question I would ask is, how much can you rent the home for?  If you can make some money, I'd keep the home.  If you can only rent it out for 1000 or less, i'd wait until April and sell. 

Good luck!
  • November 16 2012
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wetdawgs nailed all the key points pretty well in my opinion, but I will give you my 2 cents regarding renting to friends/family/etc:

In all of my years managing my own rental assets I had always avoided friends and family because of all the "bad" stories I had heard.  Once I reached a financial position where if a tenant did not pay the rent for "x" amount of time I could afford to evict them and find somebody else...my fears evaporated.

Not sure where you are financially, but be prepared for the following "common" experiences in regards to renting to loved ones--granted some family/friends would never do this, but expect it in the back of your mind:

1. They get REALLY comfortable and bend some rules in the contract.  IE parties, etc.
2. They get even MORE comfortable and decide to not pay you the rent for a month, or two, until they "get back on their feet."  Or they will pay you constantly late and never include a late fee because they don't think it applies to them since you guys are good buddies/related  (This happened to me this year with one tenant that didn't pay 2 months of rent, a friend+family I have known for over 20 years!).
3. They don't want to "bother you" with problems on the property, and will let them ride out for years...until the problem is too bad to ignore, and it then ends up costing YOU tons more money to repair.  Logic in this?  You guys are pals, and they don't want to hassle your life.

In either of the 3 points prepare for sob stories that will break your heart, and tug at your emotions.

Best wishes from So-Cal and good luck
  • November 16 2012
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Profile picture for wetdawgs
1.  Probably not because it changing the original use away from just your primary residence.  Please call the irs on this one or meet with your CPA/tax accountant.

2.  Maybe, maybe not.    You need to compare your current payments with payments after refinancing and calculate in the closing costs.

3.    You need to know the landlord tenant laws for your state (search on the internet) to cover the contract.    Often office supply stores such as Staples sell rental contracts.   If you pick one up, make sure it is valid in your state.   I'd not recommend writing one of your own unless you do so with an attorney.

#4 - see #3

#5.   Risks - they trash the place and you have to spend a lot of time and money getting it ready for sale.   Selling a property from 1000 miles away is a bother.    Also, You do have to declare all rental income on your taxes.  IRS has a good section on their website on what is allowed and not allowed for deductions on rental properties.

I'd sell it after you've hit your 3.00 years, although you can of course list it a month or two before that date. 
  • November 16 2012
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