Buying a home / renting it to a friend

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Mark2614
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Buying a home / renting it to a friend

Post by Mark2614 »

My friend wants me to buy a home for about $100,000 and rent it to him for about $1,000 to $1,200 with option to buy later when his financial situation / credit is sufficient. He's been begging me to do it -- and while I already have too much money in real estate and don't really want more, the monthly rental income amount seems reasonable.

I know a lot of you will jump at the opportunity to say DON'T RENT TO A FRIEND, as it can cause bad relations. We would make it VERY clear from the get go that I would treat this rental like I'm renting to a complete stranger with late payment fees, payments, eviction notices (if necessary), etc.

Does this seem like a decent offer or should I pass? His goal is to buy it. He initially asked me to buy it and sell it to him on land contract. But then I suggested possibly renting with option to buy (similar idea/outcome, but less complicated).

I would be using none of my own money, and 100% of the banks money. My bank will offer me $100k loan at around 3% interest (a line of credit, instead of a mortgage) so I can use the line of credit loan to buy the house without a traditional mortgage loan. In other words, this would be an opportunity to make money by investing little to none of my own money (using mostly the bank's money).
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sdsailing
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Re: Buying a home / renting it to a friend

Post by sdsailing »

What are the exact reasons he cannot buy it himself?

What is the market rent?

How long of a lease is he willing to sign?

Is there any benefit to you to rent it to the friend vs a stanger?
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dm200
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Re: Buying a home / renting it to a friend

Post by dm200 »

Mark2614 wrote:My friend wants me to buy a home for about $100,000 and rent it to him for about $1,000 to $1,200 with option to buy later when his financial situation / credit is sufficient. He's been begging me to do it -- and while I already have too much money in real estate and don't really want more, the monthly rental income amount seems reasonable.

I know a lot of you will jump at the opportunity to say DON'T RENT TO A FRIEND, as it can cause bad relations. We would make it VERY clear from the get go that I would treat this rental like I'm renting to a complete stranger with late payment fees, payments, eviction notices (if necessary), etc.

Does this seem like a decent offer or should I pass? His goal is to buy it. He initially asked me to buy it and sell it to him on land contract. But then I suggested possibly renting with option to buy (similar idea/outcome, but less complicated).
1. Why is he so anxious to have YOU do this right now? What is the hurry/rush?
2. Why doesn't he find a house for rent or sale in this price range, rental range, etc. - and offer this "deal" to someone who already owns such a house?
3. Just a hunch - but I think there may be some very important facts about this whole situation that you are not aware of.
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Mark2614
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Re: Buying a home / renting it to a friend

Post by Mark2614 »

sdsailing wrote:What are the exact reasons he cannot buy it himself?

What is the market rent?

How long of a lease is he willing to sign?

Is there any benefit to you to rent it to the friend vs a stranger?
Right now his job is mostly cash based so while he makes good money, he doesn't make a lot on paper to get a loan to buy it himself.

Market rent is probably a bit less than what he would offer me.

He seems like he really wants this house so he seems willing to pay higher rent than normal and probably sign a long term lease if I asked him to. At least 3 years with option to buy is probably possible.
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sdsailing
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Re: Buying a home / renting it to a friend

Post by sdsailing »

I would absolutely want the rent premium plus the long term lease.

Rent to own may be better.

Have you considered making him the mortgage loan at a stiff interest rate? That would seem to be the best alignment to your mutual interests.
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cheese_breath
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Re: Buying a home / renting it to a friend

Post by cheese_breath »

Mark2614 wrote: .... I know a lot of you will jump at the opportunity to say DON'T RENT TO A FRIEND, as it can cause bad relations....
So you already know the answer.

What's the problem with his financial / credit situation? What is he doing to improve it? Why do you think making it "Very clear" will preserve the friendship if you have to evict him? After he's evicted do you want to be a landlord to REAL complete strangers?

Do you think possibly the reason he's begging you is because nobody else will extend him any credit? And do you think because it's you he will be more likely to pay his rent?

This is a lose-lose situation. You lose twice.
The surest way to know the future is when it becomes the past.
Topic Author
Mark2614
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Re: Buying a home / renting it to a friend

Post by Mark2614 »

sdsailing wrote:Rent to own may be better.

Have you considered making him the mortgage loan at a stiff interest rate? That would seem to be the best alignment to your mutual interests.
Can you elaborate on these? Why is rent to own better? What do you mean by making him the mortgage loan? You mean a land contract sale where he pays interest? Why is it better? He did offer to buy it under land contract for $20k more than what I pay and 7.5% interest over 5-years. Then a balloon payment for the final balance (after 5 years) when he can get a loan.
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Raymond
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Re: Buying a home / renting it to a friend

Post by Raymond »

Mark2614 wrote:Right now his job is mostly cash based so while he makes good money, he doesn't make a lot on paper to get a loan to buy it himself...
Well, isn't that convenient - and you know for a fact how much he makes, or does he tell you he makes kajillions of dollars?

Also, depending on the nature of his job, you might look up "asset forfeiture of rental property" :twisted:
"Ritter, Tod und Teufel"
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sdsailing
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Re: Buying a home / renting it to a friend

Post by sdsailing »

I missed the part about the land contract. Yes, I like the land contract option best.

20k plus 7.5 percent sounds fairly attractive to me. You retain legal ownership with the lc. Have you run a credit check? I would do extensive due dilligence here, including income verification, tax filings, etc.
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BL
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Re: Buying a home / renting it to a friend

Post by BL »

Right now his job is mostly cash based so while he makes good money, he doesn't make a lot on paper to get a loan to buy it himself.
Is this another way of saying it is illegal? If so, I would avoid it completely or you could get dragged into it as well.
dolphinsaremammals
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Re: Buying a home / renting it to a friend

Post by dolphinsaremammals »

This smells. Illegal income or illegal tax situation. And he wants to drag a friend into it.
nordsteve
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Re: Buying a home / renting it to a friend

Post by nordsteve »

I'm not sure how much weight I'd give to payment promises from a friend whose finances are "cash based" and who "doesn't make a lot on paper.". That's the sort of friend who will disappear when they find some other living situation they like better, or can't pay you. They're not going to care about the language in the lease -- after all, they have no income on paper, so there's no way for you to enforce the promises.

This is a well worn path toward you not being his friend any more. You need to be ready to send your friend packing if you're not getting paid.

Note that the interest on the loan won't be deductible without the mortgage, in the financing scenario you describe.
J295
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Re: Buying a home / renting it to a friend

Post by J295 »

My perspective includes 30 years as a creditors rights attorney.
Friend or not, I'd personally pass on this opportunity.
LordB
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Re: Buying a home / renting it to a friend

Post by LordB »

Mark2614 wrote:
Right now his job is mostly cash based so while he makes good money, he doesn't make a lot on paper to get a loan to buy it himself.

So when he wrecks the place and doesn't pay rent you will have no way to go after him for the money even assuming it is the "under the table" cash work and not the "go to prison for a long time" cash work.
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dm200
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Re: Buying a home / renting it to a friend

Post by dm200 »

Perhaps I "worry" too much - but I would be concerned about a risk of being entangled in his (apparently significant) "off the books" cash income. Might there be an appearance that you are colluding with him in hiding this cash income?
Saving$
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Re: Buying a home / renting it to a friend

Post by Saving$ »

If you already own other rental real estate, you know the following... and it not: As a LL, you must have the same criteria for each applicant. Most LL's have something like gross income must be 3x monthly rent. Gross income must be verifiable. If an applicant does not want to "count" some source of funds in a manner in which it is legitimately documented, then you cannot count that source of funds for the applicants income qualification.

So how does this deal then work?
Topic Author
Mark2614
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Re: Buying a home / renting it to a friend

Post by Mark2614 »

I told my friend I'm going to pass on this deal. It seems like a big headache to become his landlord.
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Dale_G
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Re: Buying a home / renting it to a friend

Post by Dale_G »

Mark2614 wrote: Right now his job is mostly cash based so while he makes good money, he doesn't make a lot on paper to get a loan to buy it himself.
It sounds like tax fraud. How is he going to pay the rent in prison? I hope he gets caught goes straight. If he doesn't go straight, then I hope ....

Dale
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dm200
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Re: Buying a home / renting it to a friend

Post by dm200 »

Saving$ wrote:If you already own other rental real estate, you know the following... and it not: As a LL, you must have the same criteria for each applicant. Most LL's have something like gross income must be 3x monthly rent. Gross income must be verifiable. If an applicant does not want to "count" some source of funds in a manner in which it is legitimately documented, then you cannot count that source of funds for the applicants income qualification.

So how does this deal then work?
What is your basis/justification for this "requirement"? Can you cite a reference for this alleged "requirement"?

Under some circumstances/situations - a landlord may be required by various laws and regulations to do this, but I doubt there are general or universal such requirements. [I am willing to see justification/citations].
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Dale_G
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Re: Buying a home / renting it to a friend

Post by Dale_G »

It should be the same minimum criteria. This is well covered by the Federal Fair Housing Act of 1968.

However:
Property Exempt from Federal Antidiscrimination Laws
Unfortunately, not every rental is covered by the federal fair housing laws. The following types of property are exempt:


owner-occupied buildings with four or fewer rental units


single-family housing rented without the use of advertising or without a real estate broker, as long as the landlord owns no more than three such homes at any one time

Dale
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Raymond
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Re: Buying a home / renting it to a friend

Post by Raymond »

Mark2614 wrote:I told my friend I'm going to pass on this deal. It seems like a big headache to become his landlord.
I'm glad you did, I think you dodged a bullet here.

Now if your friend gets mad and doesn't want to speak to you anymore, well, you also found out how much of a friend he really is :twisted:
"Ritter, Tod und Teufel"
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