Can You Rent to Family Members?Written By PropertyLoop July 26, 2021
It is often assumed that letting out a rental property to a family member or close friend will allow both the landlord and the tenant to easily sidestep many of the aggravations and hardships that can sometimes come with the rental experience. However, in most cases this relaxed approach to curating a tenancy will spell its downfall, ultimately making renting far tougher than it needs to be.
Do You Have to Charge Rent?
As many that choose to rent out a rental property to a family member or close friend hope to provide this relative with a cheap and expedient method of obtaining a new home, taking their first steps towards independence, or simply offering a hand in a time of need, the temptation to charge them a low, or below market rental fee is always present. However, whilst these are well intentioned thoughts they are not always as easy to see through to fruition. This is not because it would be difficult to sustain the business on such a low income as in such instances the owner of the rental property is not seeking to generate a handsome profit from the accommodation, but with this being said there are other parties that do have an interest in seeing a financial return.
With this in mind for a property to be let out a landlord must possess a buy to let mortgage and will be found in breach of the terms of a residential mortgage if they continue to rent out a property regardless of this. However, when renting out a property to family members, simply ensuring that the correct mortgage has been taken out will not be enough, with many buy to let mortgage providers deeming those that are close to the landlord as somewhat “high risk”, because of the leniency that they may be granted by the landlord if they begin to accumulate rent arrears.
Further to this many buy to let mortgage providers will demand that the owner of the rental property charges an established rate that is higher than the amount the landlord is obliged to pay to the providers each month in mortgage interest payments.
It is also worth mentioning that whilst intentionally charging your family or friends a lower rental fee is seen as “the right thing to do”, this mantra will not carry through to the many costs that come with owning a rental property. Repairs will need to be carried out, furnishings, appliances and other contents will need to be maintained or replaced, with none of this coming for free.
Despite the close relationship the landlord may have with the tenant, if the running costs begin to mount they will not be able to simply increase the amount of rent the occupants are required to pay at any time. This is another reason why even when renting to family members or close friends, having a comprehensive tenancy agreement in place is of the upmost importance. Providing that the owner of the rental property has established a fixed term tenancy they will only be able to increase the rent if a new tenancy agreement is signed by all concerned parties, with the tenant having no obligation to agree to these higher payments. Alternatively, if a periodic or rolling tenancy is in place then the landlord is able to increase the amount the tenant is expected to pay each term in rent; however they are only able to do this once per year. In some cases the tenancy agreement may include a rent review clause, allowing the owner of the rental property to increase the tenant’s rental fee, but, even with such a clause ample warning must be provided to the occupants of the rental, with the increase still falling in line with what other rental opportunities in the area are charging.
Do You Need to Reference Family Members?
It goes without saying that for many in the rental industry they wouldn’t dream of letting out a property to a tenant that they haven’t first put through the appropriate referencing checks. Whilst a landlord is not legally required to reference the occupants of their rental property, the overwhelming majority of rental property owners choose to do so as this always them to easily navigate problem tenants by simply not renting to them.
Typically when a tenant is required to undergo the referencing process their suitability for the accommodation will be evaluated, granting the landlord with the peace of mind that the tenant will respect the condition of the rental property and they will be punctual in their rental payments. To this end the referencing checks commonly demand a thorough inspection of the aspiring tenant’s financial suitability for the rental, assessing their credit score, employment status, consistency of their income and their proven ability to clear historical debts in an effort to show the landlord that they are able to keep up their obligation to pay the agreed upon rent. Further to this when a tenant undergoes referencing they will need to obtain a reference from their most recent landlord. This is essential for property investors and owners as they will have a first-hand account of the tenant’s behaviour, and conduct throughout their last occupancy.
In many cases when renting to family or friends, due to the nature of the often longstanding relationship the landlords or tenants may feel that this aspect of the tenancy is not needed. However, this can prove to be a detrimental mistake that can ultimate result in being very costly for the landlord in the long run. If the owner of the rental property is intending to take out rent guarantee insurance or other similar policies that will offer them financial protection for when their tenants default on their rental payments, the insurance provider will often demand that the landlord has put the aspiring tenants through the referencing process.
Once the prospective tenant have gone through the referencing process the party that carries out these checks will typically inform the property owner if they recommend that if they decide to proceed with the tenancy if they should request the tenant first obtains a guarantor. This could further complicate matters as in the overwhelming majority of cases when a tenant needs to get a guarantor they will turn to a close friend or relative, however, if the tenant is also a relative of the landlord this could make pursuing any outstanding debts they are liable for “undesirable” as the landlord will also be well connected to this additional party. Further to this before proceeding with the tenancy the landlord will need to communicate with their insurance provider as in most cases the terms will differ if the tenant has a guarantor. It is also worth mentioning that similarly to the tenant, the guarantor will need to undergo the referencing process as if the occupants are unable to pay their rent or offer any sums towards damage they have caused to the property at the close of the tenancy, these amounts will be sought from the guarantor.
Will You Need to Protect the Deposit?
It is understandable that when renting to a family member a landlord may not wish to take a holding deposit to take the rental opportunity off the market, especially like in some cases, the landlord has already communicated with the close relative about beginning a tenancy. However, this leniency should not be extended to the tenancy deposit. It should be stated that a landlord is under no legal obligated t request the occupants of their rental property pay a security deposit, and when that tenant is a family member it could be an awkward situation requesting such a large upfront sum before they have stepped foot into the rental. However it is worth remembering that this will work to the benefit of both parties in the long run, allowing them to avoid difficult conversations regarding replacing damaged items or recovering missing rent at the close of the tenancy, with these appropriate sums simply being deducted from the amount taken.
If it is decided that a security deposit will be taken, it is imperative that this amount is entered into a government approved tenancy deposit scheme. This will ensure that when the fixed term of the tenancy expired the appropriate amounts are returned to the relevant parties, with any deductions being accommodated for. Whilst it could be argued that a family member wouldn’t go to such lengths against a landlord they are ultimately related to, if they fail to protect the tenancy deposit they could be taken to court and forced to pay compensation amount to up to three times the worth of the security deposit.
Do You Need a Tenancy Agreement?
Perhaps in contrast to the assumed casual nature of renting to a family member, it is essential that the tenancy is supported by a written and signed tenancy agreement. As with any other tenancy this will clearly establish the rights and responsibilities of both the tenant and landlord, serving to protect the interests of all parties concerned in the tenancy. Not only can the finer details of a tenancy agreement be lost if it is purely a verbal agreement, but should any bespoke terms be later relied upon, there will be a great amount of ambiguity that could have been avoided by having this down in black and white. A tenancy agreement will comprise what is referred to as both express and implied terms, with these being what has been agreed upon between both parties, and what the law dictates must be included in each rental agreement respectively.
In an effort to instil complete clarity in regard to the tenancy, each agreement should include the name of the landlord, the address of the rental property, the date on which the tenancy is expected to commence, the duration of the tenancies fixed term, alongside the amount the tenants should pay in rent and if this includes council tax and utility bills.
When moving into a rental property the landlord will further be required to provide the tenants with the appropriate documentation. Each occupant of the rental will need to be served with the moist current energy performance certificate for the property that gives them an overview of how energy efficient the property is, alongside an estimate of its running costs. Additionally they will need to be supplied with the gas and electrical safety checks for the property. These safety checks are required to be carried out by qualified engineers, with any appliances they find issue with being removed from the property as to not endanger the tenants. Further to this, whilst the family member or friend may not be new to renting, or may feel they could always turn to their landlord if needed due to their relationship, they will still need to be given a copy of the government issued “how to rent” guide. This document will allow them to be far more informed throughout the duration of their tenancy, making clear their rights, responsibilities and any places they could turn for help if their relationship with the property owner deteriorates, they accrue rental arrears or are facing eviction.
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