If you want to keep your friends, have a plan before becoming a live-in landlord.
Consider these tips that may help your landlord venture be a successful one (and one that might save you from making frenemies in the process). First and foremost: Make sure you can even have renters. “In some municipalities, renting out rooms of a dwelling to third parties without a permit is illegal,” says Matthew Reischer, attorney and CEO of LegalAdvice.com. Some homeowners’ associations, or HOAs, also forbid renting out rooms in your house.
It’s an odd sensation to have your former roommates become your tenants. It’s important to keep in mind that this is also a business opportunity, and rules and boundaries exist.
One of the biggest differences? This relationship is different from the kind that typically exists between tenants and landlords — including less respect than the tenant-landlord relationship usually entails. It’s what might happen if your co-workers had to suddenly report to you as their boss.
Having been a live-in landlord for three years, I know firsthand that roommates have trouble seeing the landlord as an authority after they’ve seen you in Shrek pajama pants,” says Lucas Hall, a successful landlord for more than a decade and chief “landlordologist” at Cozy.co.
One strategy, Hall says, is to not get emotional about dirty dishes or the occasional overnight guest. When it comes to timely rent payments, sharing the costs of utilities, and other nitty-gritty details, you’ve got to get the specifics nailed down.
And not a lease written on a napkin either. You should have a “rock-solid, state-specific lease, written and sanctioned by a lawyer,” Hall says. You also need to differentiate this lease from the standard landlord/tenant lease. Do that by “adding a room identifier to the property address in each lease, for each tenant,” Hall says.
Don’t forget to include basics, such as the lease’s time frame, how much the rent will be, and the date when rent is due. And spare yourself some arguments by specifying details like sharing food, a laundry schedule, and where to park.
When you rent your house to tenants and you live elsewhere, it makes sense in most cases to have the tenants put the utilities in their name. But what if you own the place and live there too? Make sure you have a plan. The rent you charge could cover utilities that you pay for. Or these bills could be separate from the rent and split evenly (it’s a good idea to put everyone’s name on the utility account).
This one isn’t going to be easy, but it helps if you discuss your late-payment policy before a problem arises. Your policy should be that if rent is even one day late, your tenant (yes, tenant, not friend, in this case) gets a note from you that firmly reminds them that their rent is due.
“I think it’s always best if the landlord treats all tenants equally in all situations,” Hall says. He suggests that if a tenant still doesn’t pay after your gentle (but firm) reminder, send a “Pay Rent or Quit” notice per your state laws.
Your friend wants to move out. Do you know how to handle that? First, review your lease agreement. According to your lease terms, your tenant-friend probably can’t just leave and duck out on paying rent before the lease period is up unless you give permission or approve someone new to take your friend’s place.
If there is not a replacement, your tenant is responsible for rent and utilities (if that was your arrangement) until the lease’s end date. If you don’t have a lease, your tenant is on a month-to-month agreement and needs to give you at least 30 days notice before heading out. If he bails on you without paying, you can sue, but this may be more trouble than it’s worth.
At the end of the day, it’s risky business to rent to your friends. “You have to be professional. And typically, friendships are anything but,” Hall says. If you can iron out all the details — and play by the rules fairly — being a landlord in your own house could be a great financial solution for you and your friends.