Buying a Home in Oahu to Rent to Family
Investment properties in Oahu are a no-brainer. With steady demand from both tourists and long term tenants, and a historically strong real estate market, Hawaii is one of the best places to buy an income property. One popular strategy is buying an income property with the intention to rent out to family. For many, this seems like a great way to know who your tenant will be and avoid the potential pitfalls from renting out to someone who won't respect the lease agreement or the property itself. While this scenario combines the benefits of real estate ownership with the opportunity to provide a home for loved ones, it also comes with unique considerations.
Before you buy a home to rent to a family member, check out these tips based on experience.
Clearly Define the Rental Agreement
One of the most common mistakes people make in this type of rental scenario is not putting things in writing. Depending on your family dynamic, it may feel overly formal to put the rental agreement into writing with a formal lease, but neglecting to do so nearly always results in misunderstandings or one party taking advantage of the other.
We get it, it's tempting to keep the arrangement informal and feels awkward to ask your family member to sign a contract. However, it's crucial to have a clearly defined rental agreement that outlines the terms, rent amount, payment schedule, and other important details. This written agreement helps set expectations and minimizes the potential for misunderstandings in the future.
Striking a balance between being a landlord and maintaining personal relationships with family members can be challenging. It's essential to establish clear boundaries and separate the business aspect of the rental agreement from personal interactions. Open communication about expectations and responsibilities at the beginning can help avoid potential conflicts or damage to the relationship.
Fair Market Valuation
In most cases, it is best to charge a fair rental rate for the property. While the property may be intended for family members, it's advisable to determine a fair market rent for the area. This not only ensures that the rent aligns with the property's value but also helps in establishing a transparent and reasonable financial arrangement with your family members.
There may be some scenarios in which a steep discount is worth it for you, and that's fine. Make sure you can comfortably afford the investment and won't be secretly frustrated at the income potential of the property. If you're going to offer your family a great deal, make sure you can do so without any resentments or regrets.
If you choose to rent to family members at a rate below the market value, be aware of potential implications. This can impact your ability to deduct certain expenses for tax purposes. Consult with a tax professional to understand the tax implications of renting below market value and to optimize your financial strategy.
Talk About Future Plans
First, figure out your future plans for the property. Are you hoping to hold on to it for 5 years and then sell to access the equity? Or maybe you want to move into the home as your own residence when you retire. Perhaps you are hoping your family members will continue to rent it for the foreseeable future.
Whatever your future plans, take the time to clearly communicate with each other so that both parties have a good understanding of the expectations and future timeline. There is a tendency to make assumptions when the relationship is personal, but this can result in major family conflict or missed opportunities in the future.
Plan for the long term and consider your exit strategy. If circumstances change, having a well-thought-out plan ensures that you can adapt to evolving situations while safeguarding your investment and relationships with family members.
Decide whether you will manage the property yourself or hire a professional property management company. While managing the property independently may be feasible with local family members, professional management becomes crucial if you are renting to family members living elsewhere or if the property requires extensive maintenance. It is not recommended to expect the tenants to manage the property themselves just because they are family.
Implement a schedule for regular property inspections to ensure that the rental unit is well-maintained. This proactive approach allows you to address any potential issues promptly and maintain the property's condition.
Investing in a property on Oahu with the intention of renting it to family members involves a delicate balance between business considerations and personal relationships. By being proactive, transparent, and well-informed, you can navigate the complexities to benefit both yourself and your relatives. Ready to find your Oahu investment property? Contact us any time.