Do parents make good landlords?

July 30, 2012, 3:07 pm Peter Boehm Yahoo7

Does it make sense to buy an investment property that is rented out to somebody in the family?

We all know it is, and will remain, tough for the average first time buyer to get a foot onto the property ladder. Even the recent reductions in mortgage rates (with hopefully more to come) has done little to make things easier as stricter lending guidelines and the deposit gap, not to mention the cost and availability of housing, have combined to keep many out of the market. This in turn limits the options for those who can’t afford to buy their first home, to either renting or continuing to live with their parents (with or without paying rent) – neither of which may be a desirable outcome.

As parents we try to do the best for our kids - providing them with a safe and loving environment and giving them our support to help them cope and be successful as they face life’s challenges and opportunities. And one of the big challenges our adult children face today (and here I’m talking about those in their late teens onwards) is how to get a home of their own. In these difficult times one option is for parents to buy a property and rent it out to their children. But is the landlord/tenant relationship a good idea when family is involved?

If you’re thinking of going down this path you need to be clear about why you’re doing it and be mindful of impact doing so may have not only on the family finances, but equally importantly, on the family relationship. Some of your reasons may include:

  • An acknowledgement it’s time for your kids to leave the nest – for whatever reason
  • It’s time for your kids to become more independent, take on more personal responsibility and stand on their own two feet
  • You may wish to help them reduce the cost and inconvenience of commuting to work or university or wherever they are studying
  • You may wish to protect them from moving into dodgy neighbourhoods or having to deal with dodgy landlords or ease them into renting through keeping a close eye on where they live and what rent they pay
  • You may want to help them move into an area they may not otherwise be able to afford
  • Buying a rental property may be a great way to help your kids and your retirement by making some money when the property is finally sold.

These are all good reasons and there are undoubtedly plenty more but I think in the main, we would buy a property and rent it to our kids because we want to help them and we want to ensure they are safe and happy. With this in mind however it’s important to remember that buying an investment property means taking on a major financial and emotional commitment so it’s a good idea to weigh up the pros and cons before proceeding.

The pros:

  • First and foremost you know the tenant(s) very well so you’ll know what to expect - good and bad.
  • There should be a much higher level of trust between landlord and tenant.
  • It may bring parents and their children closer together when children acknowledge and understand the commitment their parents have taken on for their benefit.
  • The property will (hopefully) be well maintained
  • All being well the property should, if it is bought wisely, generate some long-term capital gains thereby providing financial as well as emotional rewards.

Of course, there are also some downsides to consider.

The cons:

  • It’s a big long-term financial commitment to undertake with the same risks and rewards as any property investment – with the big difference being there’s family involved.
  • The implications if things go wrong can be significant. For instance, would you evict your own son or daughter? What happens if the property needs to be sold quickly due to financial difficulties?
  • If the property is provided rent free or at a level well below market rates this may place a significant burden on the parents’ finances which may cause problems within the family.
  • The children may feel obliged to pay market rent which they cannot really afford.
  • What happens if the children suddenly decide they don’t want to live in the property anymore?
  • What happens if major property damage occurs? Would you be prepared to sue your son or daughter for costs?
  • The property chosen may suit the needs of your child but not you. For instance, given its location or type, you may not get the financial returns you need to make it a viable investment.
  • Things can and do go wrong and this could result in major relationship stresses between you, your spouse and your children.

So there is a lot to weigh-up before embarking down this path. Before you make the decision to sign on the dotted line, here are some key actions to take:

1. Make sure you can afford to buy and rent a property to your children. Speak to your accountant or independent financial advisor if you’re not sure.
2. Make sure this feels right – you need to be on board both emotionally and financially.
3. Chose the property wisely – remember you have both yours and your children’s interests to consider.
4. Make sure your children are ready and willing to move into your rental property, and that they understand the financial commitment that you and they are taking on. Make sure they can afford the rent as well as all the other costs associated with living away from home. It’s a good idea to sit down and do a budget together – yours and theirs.
5. Set the rules – your children need to understand what you expect of them as tenants. This includes things like paying rent on time and maintaining the property.
6. Respect your children’s privacy. Just because you are the landlord doesn’t mean you can turn up unannounced. Remember they have the same rights (and obligations) as any other tenant.
7. Keep the communication lines open. If things aren’t working out or there are problems, talk about them. Be sure to sit down with your kids and work through them together.

Peter Boehm's first book, The Great Australian Dream: A Guide to Buying Your First Home , is available online and at all good bookstores. It discusses the numerous challenges Australians face in entering the property market as owner occupiers and investors and provides straightforward advice, hints and tips on getting past them.

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