Really low rent -- any pitfalls?

March 6, 2018 3:48 PM

Is there a downside (for either side) to charging a good tenant a very low rental rate? My husband and I want to decide how little to charge a friend whom we already know will be a responsible renter.

We own a small rental cottage in San Francisco. A friend is moving back here and would like to live there, and we’d like to have her. She makes very good money and could easily pay the market rate of $3,200/month, but we plan to ask for less than that. If she decided not to move in, we won’t look for someone else to live there. If we decided not to rent to this friend, she would live elsewhere in our city.

We had planned never to raise the rent on our last tenant, who paid $1,500 a month for 15 years. Since he passed away it’s been used only by our personal guests. Having a separate unit for guests is nice for us and for the guests, and we’ll lose that when we have a permanent tenant.

Given that we don’t need any income from the rental, what should we consider in deciding how much to charge? And how much should we charge? Happy to hear from renters and landlords.

posted by wryly to Human Relations (16 answers total)

I think you always have to keep an eye on wear and tear and possible upgrades or major repairs in the future. Secondly, does the lower rental rate come with any strings attached? I could imagine getting below market rate from a friend and then have them expect me to handle repairs on my own dime or something and part of the landlord/tenant relationship is that the landlord handles repairs. Your tenant may want that kind of relationship. If there are any "invisible strings" attached, you guys should talk that out.

But having someone you like and trust in a rental unit seems pretty much gold. And if you feel guilty for taking that money, why not make a regular donation (tax deductible) to a housing assistance program from the profits of your rental. You could really make a difference! I'm sure there are a number of stand out organizations in your city.
posted by amanda at 3:54 PM on March 6, 2018 [9 favorites]

I have had friends rent my place for a lower rental rate than I would charge non-friends (about a $150 discount), but also had an explicit arrangement that they were in charge of arranging for/dealing with all repairs after checking with me to make sure it was something worth calling someone for (I still paid for them- I started having them check after they unknowingly dislodged a washer hose, panicked and called a plumber when we could have just put the hose back where it belonged). I did not charge a security deposit (I REALLY knew and trusted them) and they were also in charge of lawn maintenance...this was all laid out in the lease. This is about what I would have paid a property manager to do the same stuff. As someone who is an accidental landlord and does not have a flexible schedule at all, that was a HUGE load off me.

If a friend were renting for a LOT lower than market market rate I'd probably ask them to arrange, deal with and pay for repairs and maintenance short of, say, a furnace, roof replacement, or full exterior paint job. If you charged something like $2000 a month with that arrangement they'd still be WAY under market and you could also bank money for bigger repairs like a roof, carpet/paint after they leave or a remodel way down the line, or pay for a hotel for your family when they come into town etc.

I would still have them sign a rental agreement and go over it with them carefully so everyone agrees on what is fair down the line in case things go south.
posted by charmedimsure at 4:12 PM on March 6, 2018 [7 favorites]

i've signed leases where the rent was like $4000 a month, except then there was another page where they gave me a rent concession to make it less than half that. the idea of this is to game rent-control/rent-protection laws: usually they allow a rent increase of a few percent a year, so you make the "rent" very high, so that it can keep increasing, and then charge the actual humans a much lower amount. in practice I never noticed and mailed a check for much less money each month.

i don't know if there are laws like this in San Francisco, but you might benefit from cooking up some kind of scheme like this.
posted by vogon_poet at 4:15 PM on March 6, 2018 [9 favorites]

You still need to pay wear and tear, insurance, taxes etc. Really assess all the costs - and potential future costs (how does that roof look??) and any updates you might want to do in the future. Create a spreadsheet and then go from there. Keep in mind that your friend may have different ideas about what needs to be fixed or updated than you do - and costs may be more than what you expect because of it.
posted by Toddles at 4:21 PM on March 6, 2018 [1 favorite]

If you want it back for some reason in the future, it might be more difficult to convince your friend to leave. I suppose, for your friend, if she wanted to rent another apartment later or get a mortgage loan or something, a higher rent might help prove that she could afford more, but salary history should take care of that. Mostly I just wanted to comment to say thank you for not being unnecessarily greedy about rent. That's increasingly rare around here. I think you're doing the right thing.
posted by pinochiette at 4:36 PM on March 6, 2018 [6 favorites]

You're effectively gifting her a substantial amount of money. Will that affect the dynamic of your relationship? If some horrible hardship should fall upon you and you need to rent it out for market value, how would the friend react?

As far as things like the IRS, renting below market value affects your ability to deduct things to some extent but it doesn't sound like you would be doing that anyway.
posted by Candleman at 4:54 PM on March 6, 2018 [1 favorite]

I lived in the gorgeous three bedroom house of older friends for six years at a greatly reduced rate (more or less that of an average two bedroom apartment). The rent they were charging me covered the (not inexpensive) property taxes and did go up once when taxes went up.

When either of them visited town (which was maybe half a dozen times a year) they still stayed with me.

After six years they asked me to move out as they were moving out of the country for a few years and would need to use a property management company to handle things at market rate (which would price me out).

It was a pain to move but I wasn't bitter about it. I don't see them anymore as I moved out of state so I'm not around when they visit anymore but I assume we're still on good terms.
posted by noloveforned at 4:58 PM on March 6, 2018

1. Rental agreement. This can be an open lease, even, but rental agreement the hell out of this because it affects everyone. This keeps things fair and preserves your relationship with this person.

2. $1,500 you say? Do you owe anything on the mortgage of this rental? If yes, increase the amount per month from $1,500 to whatever the mortgage payment is. If the $1,500 covers the mortgage payment already or if you have no mortgage, proceed. Just make sure you run the numbers to make sure the $1,500 covers your capital gains taxes as well!

3. Add $200-300 per month for any shared utilities (gas, water/sewer, common electricity, trash removal).

4.) Add $500 to cover wear/tear and repairs.

So this brings your rental price up to $2,200-2,300/month which is still WELL under the going rate and a bargain.

I would then set up a bank account for this rental (if you have not already) where you can lump this money which can be used as a fund for repairs. I'd also pay those capital gains taxes out of that as well.

Tenant pays electric, tv/internet and cooking gas/heat.

I recommend AGAINST your tenant covering repairs such as roofs, etc. as a few have mentioned - they might not choose what you would choose, leaving you in a lurch with a crappy asphalt roof, say, rather than a rubber roof which you may have selected instead because rubber is more expensive and let's face it, they're just renting your place. Friends don't compromise friends properties and property values over roof materials. Or friendships for that matter. They just don't.

The moral of this story is: rental agreement.
posted by floweredfish at 5:30 PM on March 6, 2018 [11 favorites]

San Francisco has some intense rental laws & regulations, hopefully as a San Francisco Landlord you are familiar with them, if not find out. Friendships change, monetary situations change. If you suddenly needed to sell, would a far undermarket tenant lease hurt your sale price? (Probably), Etc etc.
posted by TheAdamist at 6:09 PM on March 6, 2018 [3 favorites]

As Candleman pointed out above, be sure to look at how it might affect your taxes. Mr. Abeja Bicicleta has a small house he started renting out last year to a former coworker at below market rate. He had priced it thinking he would break even, wanting to just dip his toes in the rental business with a tenant he knew would be responsible and treat the place well, but doing his taxes this winter found out that because he had rented it below market rate there were some different tax rules as to what he could deduct and the rental income was enough to bump him up a tax bracket, so he ended up coming out a little in the red overall for the first year of his landlord experiment.
posted by abeja bicicleta at 6:36 PM on March 6, 2018 [7 favorites]

Friendship aside, make explicitly certain that the tenant cannot sub-let, even a portion of the property (e.g. rent a room) or otherwise transfer the tenancy.
posted by uncaken at 7:22 PM on March 6, 2018 [6 favorites]

What the Adamist said about the impact of a below-market lease on your ability to sell or mortgage the premises, especially in a very anti-eviction legal environment like San Francisco.
posted by MattD at 7:51 PM on March 6, 2018

If your friend wants to live there, having friendly landlords is already a huge bonus. If she can well afford to pay, then charging anything dramatically below the going rate is veering into the territory of unnecessary and burdensome favours that end up distorting relationships.

I think it would be reasonable to charge 10% or 15% below the going rate.
posted by Azara at 10:50 PM on March 6, 2018 [5 favorites]

I rented a cottage in a very pricey part of greater Boston for about 1,500 a month under market. The land lord really wanted people they liked who were handy and willing to help maintain the place and that was us. It was more important to them to make a little money headache free than a lot of money with many headaches.

I was very grateful, years later I don't even treat my own home half as well as I treated that cottage.
posted by French Fry at 6:07 AM on March 7, 2018 [2 favorites]

Over the years we've done this a few times, charging rent way under market rate with the agreement being that they take care of the place rather than treat it like a rental, if that makes sense. Two of those times it has worked out really well, but one time the renter failed to come through on their side of the bargain. I'm not sure if that was just luck of the draw, or if charging closer to market rate might have selected for a better tenant, but for us it was a lesson in making expectations clear and explicit and in making sure that the below market rate rent is still high enough to cover unforeseen costs (like a renter who accidentally damages the place, say).
posted by Dip Flash at 6:38 AM on March 7, 2018

Response by poster: So many of these comments have been helpful, so instead of best-answering all of them, I favorited instead. Thanks to those who commented. Still welcoming new answers!
posted by wryly at 10:19 AM on March 7, 2018