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Many investment-oriented parents consider the possibility: “What if I bought an investment property for my grown child to rent from me, while they are a single young professional?” It is an intriguing idea, and one that many parents act on, given the many advantages of a trustworthy, long-term tenant. Still, there are plenty of risks to beware of, particularly for parents who are unfamiliar with the property management business.
Advantages
Fewer Headaches: Finding and screening tenants is usually the most time-consuming task that landlords undertake. A tenant who is trustworthy, open about their plans for the future, and reliably employed is a landlord’s dream, and parents often (but not always) have these ideal characteristics in their adult children.
Better ROI: Vacancies and troublesome tenants who fail to pay rent are two of the most expensive problems that landlords face. The risk of offspring tenants simply vanishing from the property one day, leaving it vacant and damaged, is obviously much lower than the average tenant with no personal connection. Likewise, the risk of them squatting in the property without paying the rent, and forcing their parents to take them to court to evict them, is also lower. By reducing these major risks landlords can expect a far greater return on their investment. And there is almost no risk of a parent’s grown child suing them for, say, lead paint poisoning, or other common litigation liabilities.
Appreciation: Like all real estate, the property may well appreciate in value over time but artists, musicians, and young professionals also tend to be harbingers of neighborhood gentrification. Because of their modest finances, they cannot afford neighborhoods that have already gentrified so they look for the safest, most fun community that they can afford. They then proceed to improve these neighborhoods with co-ops, art galleries, hip little bars, funky restaurants, and a disdain for criminal elements, all of which lead to the neighborhoods’ sudden explosion in popularity (and, of course, value).
Tax Advantages: While these are largely understood, they are worth reiterating here: every single expense the landlord incurs, from mortgage interest to repairs to insurance to property taxes to “depreciation,” it all can be deducted from landlords’ taxable income.
Risks
Beware of Exceptions to Good Rules: Landlords who lease to their children are far more likely to make exceptions for them in an effort to help their children out – at the expense of their bottom line. For example, landlords are more likely to accept a lower security deposit or no deposit at all. They are also more likely to charge below-market rents, fail to charge their children late fees, fail to file for eviction, and fail to deduct charges from the security deposit (if they bothered to collect one in the first place). Finally, the parent investors are likely to consider their children’s opinions and preferences when choosing the investment property, a decision that should be made based on market factors alone.
Strained Relations: Landlord-tenant disputes happen all the time because what is best for the landlord is not always best for the tenant. Landlords want the maximum rent and minimum costs sunk into upgrades, repairs, and maintenance, while tenants want the opposite. It is possible to successfully mix family and business, but all parties involved need to understand and respect the inherent challenges and risks involved.
Adult children who remain young, single, and promisingly employed can be the perfect tenants, and finding a great deal on an investment property for them to inhabit can prove a grand slam investment for parents looking for cash flow, tax deductions, and appreciation. But parent investors should treat these rental investments just like any other investment, with an eye for profits and strict efficiency. Otherwise, they may find themselves strapped with financial losses and strained relationships with their children.
