5 Things I Wish Someone Had Told Me Earlier about Real Estate Investing… (Part 2 of 5)

by Vena Jones-Cox

2. Never, EVER rent to anyone you know.

It’s inevitable: someday your buddy (or brother) Joe is going to need a place to live at exactly the same time that you have a vacancy. It’s going to go through your mind that this might be the perfect solution for both of you.

Joe’s a nice guy, and with his carpentry skills (he was the one who drilled through the fridge door in your college apartment to invent—the Keg-A-Rator!), you know he’ll fix your place up real nice. So, in a gesture that you will NEVER cease to regret, you offer Joe your vacant property. He gets a discounted rent, you get a tenant you can trust, everybody wins.

Everybody, that is, except anybody who’s even remotely involved in this situation. The thing about renting to people you know (and this also encompasses lease/optioning, carrying financing etc) is that you and your friend/family member enter the agreement with opposing viewpoints in terms of the benefits of the situation.

You go in happy because you know your buddy will treat you fairly—meaning that the rent will be on time, the repairs you agreed on will be made in a timely fashion, and he won’t turn your new refrigerator into a Keg-a-rator.

HE goes in happy because he knows you’ll treat him fairly—meaning that you’ll let him slide on the rent at Christmas, take his time on the repairs, and indulge his longtime dream of raising Rottweilers in the basement.

You think he’ll be the perfect tenant; he thinks you’ll be the perfect landlord. It’s a conflict of outlooks that can’t be resolved without lawyers or fisticuffs.

Remember, when you become a housing provider, your outlook on life undergoes a major change. Your friends who are still tenants probably haven’t had the benefit of experiencing that kind of entrepreneurship, and more than likely have no idea what it’s like to invest huge chunks of time and money in a property.

My partner once lost not one but an entire group of college friends when he evicted one for nonpayment of rent; suddenly he’d become “The Man” and was no longer welcome at the poker games.

I have a brother who can’t see me at family gatherings without eventually coming around to the subject of how shabbily I treated HIS best friend by forcing him to pay late fees every month. I have never, ever seen a situation like this work out to the satisfaction of both parties. If you have, I’d like to hear about it.

On the bright side, since no one ever tells people that renting to friends and relatives is a Very Bad Thing, there are an awful lot of buying opportunities out there generated when owners realize they’re never going to see a dime out of Joe. Keep your eyes open for these situations; they can become some of your best deals.

Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by clicking here. One per household, please.