Negative $800 cash flow/month to help family friend?

91 Replies

Originally posted by @Dan Maciejewski :

Say they actually perform and pay the $1700/month (They still have to be verified that they can even afford that -- it doesn't really sound like it).  Then the best case scenario is that your girlfriend is donating $10,000 to a charity case.  If that's what she wants, that's fine -- it's her decision, although that's not squeezing "pennies", that's giving away thousands.  That is assuming that they pay the full amount of rent up front and keep the place immaculate -- literally better than she kept it.  

The actual, more likely scenario, as already stated in this thread is that they won't pay (that's what their credit score shows), will damage things and not pay to repair them, or even tell you about them (that's what their lack of move-in funds shows), and will be a complete nightmare to deal with (that's what their lack of alternatives show).  In this case, she will have donated $10,000 (the difference in rent vs payment), and will most likely be out close to the full $30,000 in payments plus any damages that happen during the residency. Not to mention possible HOA fines that she would ultimately be responsible for. Total cash out of pocket will be upwards of $30,000, maybe $50,000+. I am all for charity, and if she wants to give $50,000 away this year, that's is great and I applaud her. The question at this place would be, is she willing to risk going into debt to give charity to a family that she knows nothing about, or would she rather donate it to a cause nearer or dearer to her own heart -- one where she knows will do good?

Now that the charity question is out of the way (however it's answered), you two can either look at setting this scenario up, addressing the question of her being better served renting or selling, or setting up either the rental or the sale once decided.

My advice would be to run from these people, as everyone else in this thread has already said. After that there are different scenarios on what would be best for her -- I'm guessing it's probably best to take the $55,000 equity (equity minus COS) and invest it somewhere that would provide a better return than a condo with PMI and an HOA. That's neither here nor there, and wasn't your question, though!

 I fail to see the $10k donation calculation.

The "market" rent is $1950, the stated rent is $1700. That's $250/month = $3k a year. The $800 negative cash flow is due to the the monthly mortgage/pmi. It's obvious that this Condo was never meant to be a rental. Even if she rents it out at $2000, she is still need will have negative $500 cash flow.

If you/your GF is looking to be charitable and/or do to a good deed for Christmas for someone, then by all means do it. Just be clear that it comes with the risk of losing the potential rent for the duration, having to pay for an eviction and having to cover whatever repairs and/or remodeling required after, with little to no recourse from the person. Plus, the risk of losing the relation with the GF/sister/boyfriend/mom, etc.

Do an estimation and see how much it adds up to - you might be better just to pay the hotel for them for the week of Christmas if you really feel that charitable - and treat your rental as a business, background check, deposits, income verifications, credit score, etc. included.

I have found that having a phantom tenant always helps. The story begins with "I would love to rent it to you but I have a tenant who will be taking the place in [Place close enough date here but far enough out to those needing something urgently are willing to wait something like 6-8 weeks] and if I put you in the apartment [this is my favorite, your own sob story about being sued for 10k] close by asking would you be willing to pay me the 10k to breach this contract for you? That usually forces them to use their other resources available to them, that they have not found yet.

@Patrick Fraire I am less concerned about the $250 per month and more concerned about the applicant being a major problem. There are several warning signs in what you said:

- Not having deposit and first months rent is a major red flag. That means they moved here without even enough savings to cover deposit and rent, very bad.

- Just moving to the area means no job or brand new job, major red flag

- Referrals through friends or relatives is a red flag. Smells like desperation and I would never have a friend or relative cosign. Are you really going to bring them to court to get your money? If the aunt thinks so highly of them, why aren't they staying with her?

- Nobody will rent to them due to poor credit - major red flag. Why do you think all the other landlords are rejecting them? Your girlfriend knows NOTHING about selecting tenants and the landlords rejecting this applicant are EXPERIENCED. 

You are looking at this the wrong the way. She is thinking worst case she is out $250 a month. The real worst case is they stop paying rent all together. In California it could take 6 months or more to evict them. That could cost her $15K after months and lawyer fees! 

If you do consider renting to them, pull a full credit report, get landlord references, employment references and scrutinize every detail. This is a total disaster waiting to happen.

The best thing to do would be to sell it for $400K. This is not a good investment property. 

Your girlfriend seems to have a big heart, but she is naive to the dangers of bad tenants. I would hate to see a good person like this taken advantage of and from my experience, that is exactly what will happen.

Originally posted by @Simon W. :
Originally posted by @Dan Maciejewski:

Say they actually perform and pay the $1700/month (They still have to be verified that they can even afford that -- it doesn't really sound like it).  Then the best case scenario is that your girlfriend is donating $10,000 to a charity case.  If that's what she wants, that's fine -- it's her decision, although that's not squeezing "pennies", that's giving away thousands.  That is assuming that they pay the full amount of rent up front and keep the place immaculate -- literally better than she kept it.  

The actual, more likely scenario, as already stated in this thread is that they won't pay (that's what their credit score shows), will damage things and not pay to repair them, or even tell you about them (that's what their lack of move-in funds shows), and will be a complete nightmare to deal with (that's what their lack of alternatives show).  In this case, she will have donated $10,000 (the difference in rent vs payment), and will most likely be out close to the full $30,000 in payments plus any damages that happen during the residency. Not to mention possible HOA fines that she would ultimately be responsible for. Total cash out of pocket will be upwards of $30,000, maybe $50,000+. I am all for charity, and if she wants to give $50,000 away this year, that's is great and I applaud her. The question at this place would be, is she willing to risk going into debt to give charity to a family that she knows nothing about, or would she rather donate it to a cause nearer or dearer to her own heart -- one where she knows will do good?

Now that the charity question is out of the way (however it's answered), you two can either look at setting this scenario up, addressing the question of her being better served renting or selling, or setting up either the rental or the sale once decided.

My advice would be to run from these people, as everyone else in this thread has already said. After that there are different scenarios on what would be best for her -- I'm guessing it's probably best to take the $55,000 equity (equity minus COS) and invest it somewhere that would provide a better return than a condo with PMI and an HOA. That's neither here nor there, and wasn't your question, though!

 I fail to see the $10k donation calculation.

The "market" rent is $1950, the stated rent is $1700. That's $250/month = $3k a year. The $800 negative cash flow is due to the the monthly mortgage/pmi. It's obvious that this Condo was never meant to be a rental. Even if she rents it out at $2000, she is still need will have negative $500 cash flow.

The market rent is irrelevant to the $10k calculation. The house payment is $2,500/month - proposed rent of $1,700/month = $800/month deficit paid out of owner's pocket.  $800 x 12 months = $9,600. rounded up for brevity is $10,000 dollars out of pocket.

The reason for the deficit ("It's obvious that this Condo was never meant to be a rental") is the reason for my last statement that I would sell the property and invest in something better.  But that doesn't really matter to the initial question of whether or not she should "donate" $800/month to seeming deadbeats.  I made it the yearly $10,000 to illuminate the size and gravity of what she is considering.  She seemed to not want to look like a penny pincher, when in actuality she is considering something that could set her back many years financially.

That's the thing, we do not even know if the OP's gf is even planning to do this as just a favor or she plans to be a landlord for the long-run.

@Patrick Fraire - I think the community is all on the same page here that this is a bad idea and it sounds like you agree. Now it's trying to figure out how to protect you girlfriend from being taken advantage of (good bf). This is more about managing the situation at this point. I would try to find a way to not rent to them in the nicest, as you said more "humanitarian" way possible. So obviously have them pay utilities, since the HOA is $250 say the rent is $1700 but they need to pay the HOA so the total is $1950 (back to level with the market). If they can't afford it hopefully that turns them off enough that they continue looking elsewhere.

This makes it so your girlfriends offer wasn't a lie, it just wasn't complete hopefully pricing them out of the rental since they really can't afford it. My suggestion would be instead of renting to them as a "help" I would try to do more of a one time help so it appeases your girlfriend and her family. Maybe help find some places that are available in their price range? Provide some help like giving $500 to help them move in, etc. This way they are not her long term problem.

TO BE CLEAR: I am suggesting she doesn't lend money, rent to family or friends of family (probably more this situation), and doesn't get taken advantage of. But based on where you at and based on your question I'm trying to find the best solution to the situation she is in where it helps you keep her out of getting stuck in a bad situation and helps your gf work through the situation of her offering up her place.

I hope this helps and best of luck. Feel free to reach out for any other suggestions sounds like a complicated situation now you just have to find a way to ease out of it.

We had elderly neighbors on our cul de sac.  Loved them.  He lost ability to do stairs.  We pointed them towards a condo that is totally handicapped accessible.  They said they couldn't afford it.  (Apparently still owed money on their house despite being there 37 years.)  We bought the condo and said "Rent is $1700".  They said "All we can pay is $1400.  We did it anyway.  Found out they had no money because they gave it all to a son in law with cancer for treatment.  We will never raise their rent,  either.  We can afford it,  it's our version of charity (yeah, I know not tax deductible.)  But that's a choice we made together.  For people we know and love.  And rent is a week early every month.  (We paid cash for the property so not a negative cash flow situation.)  But this...is her sister's boyfriend's COUSIN.  Way way beyond helping "family".  I'm guessing they wouldn't even pass the background check.  Hard no for me,  and I'm a bleeding heart.

I barely read it and NO. unless shes a billionaire and ready to lose hella money, relationships, and her mind

At end of the day it is your GF choice if she wants to use her old condo the way she wants. You are smart to step in to help advise but that is the best you can do unless you both are contributing to your household expenses and the difference she has to pay towards the condo will create shortage in your household. 

The other thing to consider.... if she rents to them when its time to do taxes, she I dont think can claim as an investment or might cause problems. I remember many moons ago when I was doing my own taxes that the IRS asks if you are getting current market rents.

An OPTION Help them out by having the aunt co-sign on another apartment cheaper and you all can give them $300 per month for say 2-3 months so they can get settled in but dont sacrifice your livelihood to help someone else out. Charity starts at home.  

My only contribution is to acknowledge that there are a higher than average number of funny responses in this thread. It's clear that there are some experienced, well-worn landlords around here :)

That aside, I agree with the general sentiment - I wouldn't do it. Either run it as a business (e.g. profitably), or don't rent it at all, and just sell it. Take the equity off the table and do something else with it rather than just giving it away to someone else for free in the form of negative cash flow. 

People who own businesses, investments etc. are always asked for discounts to 'help someone out'.  What you have to realize is that if fair market rental is say $2000 per month, and you lease it out to a friend or relative for say $1500 per month, its the same as leasing it for $2000 to some else and giving that friend or relative $500 per month cash.  if you wouldn't do the latter, then don't do the former.  In fact leasing it out to someone for $2000 and just giving the person in need $500 cash is preferable because (1) the recipient of a discount will never appreciate the discount, all they see is the amount their paying (2) the recipient of the discount will feel that any request they make that you deny is due to the fact that you are giving them a discount and will be mad at you for denying the request (3) if you treat them as you would any other tenant by insisting on timely rent payments, adherence to rules, etc. they will be upset because you are treating them like 'strangers', and finally the odds are overwhelming that you, they, and various other relative will end up ruining any relationship you have especially if you are forced to evict or go after the guarantor.  

In sum, the world in which we live in is one in which no one accepts responsibility and everyone is a victim.  While it is entirely possible someone can end up with no money and bad credit due to external forces (medical, loss of job, etc.), it is much more likely that inability to control spending and disregard for the sanctity of credit payment promises is the reason for their predicament.  When I want to help someone out I give them cash, and often fully expect I will not be repaid.  

@Patrick Fraire they are obviously taking advantage of her. However, if she feels like she MUST do something tell her to take the middle ground.  She already knows, at a MINIMUM, she will lose $250 per month if she rents to them.  Explain to her that she should protect her condo and tell them NO, but if her bleeding heart still wants to help she could just pass them $250 every month.  It won't help them about their deposit or their bad credit, but that is not your GF's responsibility.  An offer of a free $250 per month should NOT be seen as being selfish by your GF's sisters boyfriends cousin.  It is a VERY generous offer, but the sisters boyfriends cousin will probably say NO because it is not everything that she wants. At least your GF will have made a reasonable offer to save face.  IF the sisters boyfriends cousin does accept the offer, I am pretty sure that your GF will get tired of passing over $250 dollars each month to a complete stranger VERY quickly and figure a way to cut the tie.  She will have learned a lesson, but not lost her condo.

Your girlfriend should sell.  Or rent to someone else. For sure there would be more qualified tenants. 

If the aunt is willing to cosign, then why not market rent?

The only thing I might consider for the short term, and only if the prospective tenants were much closer to being qualified, is to charge the market rent minus the mortgage principal. I wouldn't mind paying my own principal (which is just paying yourself, in effect) for a very limited time to assist someone. But as everyone else has said, there are red flags galore here.

Dump the GF, she will only drag you down.

@Patrick Fraire I know this isn’t a post about relationships but assuming your gf is moving in with you, I might encourage her to sell the place and bank the equity for now. Tons of red flags like the other replies state BUT if she is determined to keep the place, $550 and $800 out of pocket are both better than $2500 when she’s not even living there. Tough one

I don't think this is you being greedy.   She may be getting taken advantage of, she also just might be a super generous person.   I might try explaining to her what she is going to be giving up as a yearly total ($3,000) and then ask her if she things that is worth it.   It's up to her how she wants to spend her money.

As far as her getting "stressed out."  There are two things happening, you're explaining it in a way that is forcing that to happen, or she is not prepared to handle the realities of making a cost/benefit analysis.   If you're doing it to her, then make an adjustment to your approach.   If it's her, then she doesn't have those skills yet  (I call them being an adult) and you probably just have to let it go.  It's likely she is using her emotions and not critically thinking.  This presents a lose/lose situation for you.

Business should be business and charity should be charity. I wouldn’t mingle the two.

@Patrick Fraire

Be mindful of mixing business and family.  

There is a real scenario in which you could be the one bad guy in this equation.  Explain the facts and break down the data to your girlfriend.  

She will be writing checks every month to pay the difference.  Does she clearly understand that?  California is tenant friend state and has she considered if things go south.  Does she really want to go through an eviction with a relative?  What happens if the relationships dissolve?

Looks like @Karen O. has hit all the points.   

Good luck,

@Patrick Fraire My best friend’s sister’s boyfriend’s brother’s girlfriend heard from this guy who knows this kid who’s going with a girl who saw Ferris pass-out at 31 Flavors last night. I guess it’s pretty serious. Downsizing from the #1 most expensive state in the US to the second most expensive one because of bad credit and family issues? They can’t afford either of those locations if they can’t even cough up a deposit. I have compassion for those falling on hard times, but this sounds like a pattern of poor decisions led them to this point. Maybe there’s reality show potential there. They really should be looking to live in a “flyover” state like mine, with low taxes and good jobs and affordable homes. If they get into that condo, they’ll never leave. They will assume your gf is still making a profit because nobody in their right mind would do that deal otherwise. AND they’ll never be willing to move out to a unit they can afford because an affordable unit in their price range would be so much less than what they will be used to. It will be a kicking and screaming eviction or your gf will have to stop making payments and let the bank take the condo back. Magic 8 ball says get a new gf. The red flag is her willingness to go upside down on deals like this, and half those losses will be yours if you marry. Not just this deal, but future deals. If she gets 100% of the decision here, it (and her thought process) needs to be 100% fixed if she is to be the one.
Negative cash flow. It sounds like the “family” wants to do everything except pay you. Mom will co-sign but will mom pay the $800? Does your gf make enough passive $ to cover this without hurting her finances? Why can’t mom co-sign for a place they can afford? Sounds like a typical guilt trip to me. Tell your gf to VERY politely say “no” and offer to help them find a place they can afford. This is a business. She needs to draw a line.
@Patrick Fraire This is not family. You’re loosely connected by two girlfriend or boyfriend relationships. If one goes back far enough I believe we’re all related. A lease between a landlord and tenant is a more binding commitment in the eyes of the law than a boyfriend/girlfriend relationship which can be broken quickly without strings attached. Your girlfriend would be much better off selling and just giving them $800/month. Not sure why she moved or where she lives now. Not sure what income the distant relation has. Not sure how the determination was made they can pay $1700. Damaged credit suggests not being able to determine affordability. It all sounds very convoluted. How about they move to Dayton, OH where they can get a nice 4 BR/2 BA in a good school district for less than $1700? Or somewhere similar? I’m all for charity. I aim to keep increasing my giving until my days on this earth are over. In fact I want to get to a place where I’m radically giving. However I’ve learned through acts of generosity that charity and business are separate things. If she rents the condo to these people she needs to understand it’s charity and it’s very likely to cost more than she realizes.

Ask your girlfriend id she would like a NEW car ? 

Thats what the negative cash flow would pay for . 

(and a nice one at that )

Negative any amount is never an investors friend.  If it's to help family, that is one thing.  If this is being treated as an investment, the word negative is a no no.

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