Landlord living with tenants - should there be a lease?

10 Replies

I just purchased my first property and am going to have tenants living with me for my first year or so. I want to make sure I have all my legal ducks lined up when it's time for them to move in. 

I have a few questions in regards to this, if anyone can answer any of these it will really help me out; 
Do I need to provide a lease to my tenants? if so, do I need to be on the lease as a tenant?
Are there different statutes that take place if the landlord lives with their tenants?
Are there any tax differences when living with tenants?
What documentation should I receive from my tenants before they move in?
Any other advise would be helpful as well.

Thanks!

- David

Yikes!  Since you are the landlord you will not need a lease.  A lease is a contract.  Would you make a contract with yourself?  So you are going to live with your tenants, and then if they do something wrong and you have to kick them out are you prepared to do battle?  Nightmare in motion is what I see for you. 

Think long and hard before you do this.  Life will never be the same as you know it now.

Nancy Neville

Yes!!! you should use a lease agreement.

check with your CPA on the Taxes

@David Florist I was/am in your situation and I believe having a lease is most likely needed! The paper trail and potential tax benefits is very much essential.

People tend to be less formal with roommate situations, but you should be more formal with your procedures/agreements.  A big issue that is often overlooked in roommate agreements are very frequent or long-term guests.  You also need to specify parking and use of shared areas.

I would go month-to-month on the roommate agreements.  Also include some mechanism for increasing rents and providing adequate notice.

Tenant screening is extra important since they are both a roommate and tenant.

In terms of taxes, part of your property will be a rental and part will be your primary dwelling.  I would consult a tax professional on what is reasonable.

1.  Screen your tenants well, just as you would if you were not living together. Tenant compatibility is even more important as you are sharing common living space. Decide what kind of tenant you want: Housemate-Tenant (shares the whole house with you), Border-Tenant (lodger with their own bedroom and possibly bathroom), Tenant-Tenant (has separate living quarters in the same building). Make sure you comply with the zoning laws for your location.

2.  Prepare a month-to-month rental agreement instead of a long term lease, as it can be terminated for no cause much easier if things don't work out or as needs change for either you or your tenants.

3.  You own the property and you don't need to be on the rental agreement as a tenant.

4.  You are essentially housesharing and renting out rooms and use of some common areas. Each party should have their own private area, with or without locks depending on the type of relationship you set up.

5.  Learn the landlord-tenant law for your jurisdiction. In some houseshare situations, not all Fair Housing laws apply.

6.  Write up an information sheet about the house. Set property rules or house rules. Decide if utilities will be included or the cost shared. Decide if household chores will be shared or not. Decide if you will be providing furniture for the bedrooms/separate dwelling units or not.

7. Keep good financial records. You will keep records about the house and records about your rental business. Get assistance from a qualified tax professional. Some records you will need to keep to help you get the tax benefits that you qualify to receive and to keep you in line with what you need to report.

8.  Read some good books about housesharing. One of my favorites (published years ago) is "Living with Tenants: How to happily share your house with renters for profit and security" by Doreen Bierbrier.

Definitely have a tax attorney to help you find tax breaks as a landlord, if they're good, they should be able to save you more money than they cost.

Originally posted by @Vincent Crane :

Definitely have a tax attorney to help you find tax breaks as a landlord, if they're good, they should be able to save you more money than they cost.

The tax situation shouldn't be that complicated that it would require a lawyer.  I would definitely recommend a professional tax preparer with specific experience for at least the first couple years of returns.  It doesn't necessarily need to be a CPA, an experienced Enrolled Agent will likely be at least as good.

It may be worth having your first agreements set-up by a lawyer.  There isn't much point in making leases that wouldn't potentially hold up in court.

I think formalizing the relationship with roommate/tenants will make it harder to find roommates, but I don't think this is necessarily a bad thing.

@Jesse T.

Yeah I just mean in general, making sure to capitalize on all the tax advantages of that primary residence and other secondary investment properties are all-to-often overlooked by people not wanting to spend the money on a quality lawyer/CPA to really build out the entire real estate team they need. There's a lot of extra money to be found under the rocks if people are willing to lift them up and look :)

Originally posted by @Vincent Crane :

@Jesse T.

Yeah I just mean in general, making sure to capitalize on all the tax advantages of that primary residence and other secondary investment properties are all-to-often overlooked by people not wanting to spend the money on a quality lawyer/CPA to really build out the entire real estate team they need. There's a lot of extra money to be found under the rocks if people are willing to lift them up and look :)

I agree that a tax professional is an important part of an investing team.  A more general Real Estate lawyer is likely to be necessary at some point.  The need for a tax lawyer should be pretty rare - something like a 1031 or low-income tax credits may require it, but a specialist should be available via referral from a good Real Estate lawyer.

Even for routine IRS issues - a CPA or even Enrolled Agent can represent the investor.

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