Buy or Not Buy to Rent to a Friend?

Question

Hi,

A friend of mine who has no credit, but is otherwise very responsible, has requested me to buy a house for her family so she can rent from me.  I have no concerns about her integrity and ability to pay, I am concerned though about the financials and wonder if I should move forward.

I am in a contract for a $270,000 house in the part of town she wants to be. The 30 year mortgage and taxes is $1,800 (I am putting down 5%).  Apart from the mortgage, I would need to pay the homeowners insurance ($2,000) and homeowner's association fee ($500).  I will also incur closing fees of $10,000 and down payment of $13,500. The most she can pay for rent is $1,800.  That takes care of the mortgage and taxes, but does not take care of my initial investment of $23,000 and the other expenses I have outlined above in addition to maintenance and repairs that might come up.  I will be losing money on a monthly basis from the deal.  On the flip side, someone else is paying the bulk of the mortgage and I am building equity.

I am very confused on how to proceed here.  I have three more days when I can exit the contract with no penalty.  Any advise will be sincerely appreciated. Thank you!

Jon Holdman · Answer

You will have many other expenses besides HOA, insurance, and taxes.  (Side note:  you need landlord insurance, not homeowners.  It will be more expensive.)  This deal looks to me like you will be losing something like $500 a month.

IDK how you're going to get a loan with 5% down if you're not living there.

Doing this deal is a gift to your friend.  You're giving her $23,000 up front plus another $6000 a year.

After 10 years of a 30 year mortgage you will have reduced the balance from $256,500 to about $210,000.  If its still worth $270K and you sell you'll net about $250K after selling costs, leaving you $40K after paying off the loan.  In the mean time you will have spent $60,000 in your losses each month on top of the $23,000 you put in up front for a new loss of $43,000. To make that up you would need to net about $295K on the sale which would require a sales price around $320K.  You would need annual appreciation of about 2% to achieve that.

So, you are going to be laying out a significant amount of cash for your friend and hoping for some appreciation just to break even.  I need friends like you.

Larry S. · Answer

I definitely would not do this deal.  Monthly, you are going to pay $500 for HOA and $166.67 for insurance.  You also should set aside money each month for repairs and capital expenditures. If we assume only 5% each, that's another $180.  So you would be spending approximately $850 per month out of pocket for this house, after your friend pays you rent.

Also, as others have said, you need to be very careful renting to friends and family.  Would you be willing to evict this friend if they don't pay rent?

David Zheng · Answer

are you going to live there as well or are you just buying it for her. Cause obviously with a 5% down loan, it has to be owner occupied.

and finally no, I would never ever do this deal. treat your business like a business so credit checks, background, income verification all matters Unless you don't mind losing friends or money

Kyle J. · Answer

From a strictly numbers/ROI standpoint, it's not a good deal.  Throw in the fact that renting to a friend/family member often times ends up not working out and/or ruining the relationship, and I'd pass.  No matter how "responsible" your friend is, I would suggest only renting to someone who you're willing to evict if - worst case scenario - rent isn't paid and you are forced to have to evict.  You might think that couldn't happen, but the reality is it happens all the time.

Buy or Not Buy to Rent to a Friend?

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