'It was a headache': The reality of renting an investment property to a friend

At the tender age of 24, Ben Everingham bought his first investment property and became landlord to a tenant who was sub-letting rooms and avoiding rent payments. What made this situation particularly awkward was that the tenant was one of his friends.

“I did it to save money,” says Everingham, now 33, and the managing director of Queensland-based buyers’ agency Pumped On Property. At the time, he was in a graduate program and figured that eliminating a property manager’s fee would cut costs.

“So, I got some friends in there and just started literally picking up cash from them once a week. It was good for the first three months.”

But then the tenant developed a drug habit and struggled to keep up with rent. He also moved other people – who hadn’t been vetted by Everingham – into the house.

“It was a headache for me and for him,” Everingham says. “Because at the time, I was just so green.”

Everingham evicted the tenant, eventually, but it wasn’t the last time he rented a property to someone he knew. Over the years, he’s leased to four people who were either family or friends. None of these went particularly well.

“I wish I had a good story, but I don’t,” he says, explaining that while these properties were his business, his renters treated the arrangements as casual. Now he has a property manager who selects tenants, handles inspections, and steps in if things go wrong.

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Tessa Chong, who rents a two-bedroom apartment in the Melbourne suburb of Thornbury to a former housemate, has a more positive tale.

“The only reason it came about was because I posted on Facebook asking for recommendations for good property managers,” Chong says. “She then asked me if I was needing a tenant.”

There’s a lease in place, but Chong says the situation is fairly relaxed. She’ll check on the property occasionally, and her friend will get in touch if there are any problems. Overall, she’s found the pros far outweigh the cons.

“My friend can just go direct to me with any problems. There’s less of that ‘us versus them’ mentality that you get with landlords and tenants.”

Her advice to those considering a similar set-up is to choose wisely, and choose someone you trust.

“Just go with a friend that you have a good relationship with. Maybe not someone too close, so you’re not too involved with each other’s lives.”

Since 2011, Canberra-based investor Kavita Narain has rented an apartment to her friend, Michelle, who raised her hand when she heard she was seeking a tenant. Like Chong, she’s happy with her decision.

“I said yes to her because I knew from her personality, she would always pay on time, she would take care of the place, and we both have a very open and honest communication style,” Narain says. She manages the property herself, took a bond lodgement from Michelle, and has a lease agreement in place.

“Everything was done as if she wasn’t my friend,” Narain says. “I think the main thing, if you are going to lease to your friends, you still have to do the proper checks and vetting.” She stresses the importance of also looking after your friend in return by maintaining the property and making repairs as needed.

Michael Yardney, director at Metropole Property Strategists, says most investors he sees renting to people they know fall into one of two categories: they’re either parents providing children with accommodation in a difficult market (something he himself does for four of his own children), or adult children helping out elderly parents who might be struggling financially in retirement.

Yardney says the situation can get muddier when people choose tenants from further out in their social circle, leasing to someone whom they don’t know very well.

“They think they’re going to save money by not having a property manager. This may not be a real saving,” he says. “The risks are the tenant feels they’re special. They may think, ‘I don’t have to pay the rent this week because I’ve got to pay some other bills’, or they maybe don’t look after the property as well and do some damage.”

Some investors might like the idea of being able to drop in on a property whenever they please, Yardney points out, and lease to friends so they can visit frequently. He advises against this “because most people don’t know the tenancy legislations properly and get too involved and too emotional”.

For those still keen on renting to a mate, Yardney has a few tips.

“First of all, have a lease,” he says. “Document it as you would a normal lease.”

Yardney also suggests taking a bond for security and possibly doing a previous tenancy check to find out whether the tenant paid their rent on time – though he acknowledges this might feel awkward.

Setting boundaries from the outset can also make managing the process easier. Decide how frequently inspections will take place, determine who will pay which bills, and discuss maintenance responsibilities and whether you might want to increase rent down the track with your prospective tenant.

“You’ve got to work through the property inspection together at the beginning and agree, this is the condition of it and both sign it,” says Yardney. “Document everything up front.”