Neighbor wants to rent my SFH to foster special needs kids - Advice Needed

[Melissa Faraias]

Hello BP community,

I have just finished rehabbing my first rental property and the next door neighbor approached me and asked me if I would consider renting the property to her since she is licensed to foster special needs kids. These are kids that are severely disabled and bedridden and would need a nurse around the clock. The neighbor would sign the lease under her name and is offering to pay more than the fair market rent for the property. I am assuming that the Government pays her to foster these kids  but I would run a credit and background check on her.  I also plan to meet the director of the foster care agency, who will be placing the kids in the home. I like her mission and would like to rent to her since I have a special place in my heart for special needs kids. This is my first rental property and I plan to manage it myself so I am not an experienced landlord. Looking for some advice on what to do and things to look out for.  Is there a risk involved and if so, would it be fair to charge her a little more that the fair market rent or maybe even a larger deposit?  I really want to make this work if possible.
Any advice would be appreciated. Thanks so much in advance.

[Steve K.]

It's great that you're considering this as I'm sure there is a real need for more housing for special needs foster children, and it could be mutually beneficial. There have been a lot of posts on here about similar situations, not exactly foster care for special needs children per se, but since the children are disabled and bedridden, I'm guessing there will be many similarities to assisted living facilities. I would use the magnifying glass icon on the top right of your screen to do a search for assisted living facilities or AFL and you'll find a wealth of info as well as other biggerpockets members operating in that space who can probably offer advice based on their real life experience. 

 I'd approach the situation more like a commercial lease than residential: you'll want a longer term than typical resi, more like 5 yrs due to the time and expense of setting up the property, or reverting it back to it's original condition after. The lease will need to cover things like "trade fixtures", who owns what as far as furniture and equipment, who pays for necessary improvements to the property, who pays to return it to a normal home again after the lease ends, etc. I'd probably want to have enough of a deposit/in escrow to return the property to a normal rentable condition. I'd also want to vet the business that I'd be renting to very well, beyond just a credit check and background check I'd want to check how long they've been in business, financial statements, licenses, track record, operations team, visit other properties they operate, etc. 

One thing I'd consider as a starting point is how quickly you'll need to start seeing income from the property. It could take a while to get everything set up for this whereas if you rent to a normal tenant you could get someone in there paying rent right away, so there is that initial lease-up opportunity cost to consider. 

Because they likely receive government grants and funding, I'm guessing these types of facilities are highly regulated (I'm guessing many are in Utah and AZ for this reason, where there's less red tape than other states) and you'll want to learn all about the regulations in your area. The biggest challenge will probably be the initial investment into setting up the property for this purpose, to comply with those regulations. You may need to have a sprinkler system installed/ ADA compliance with wheelchair ramps, handrails, larger walk-in showers, wider doors and hallways, more fire extinguishers, etc. There was one woman on here a few years ago who was setting up AFL's in CT and she posted that the initial cost for setting up each home was $1-2M but that probably included purchasing the property. Other things to consider would be insurance implications (make sure your policy will cover you, and you'll probably want extra liability coverage), zoning (most likely this would be allowable as a special or conditional use within a single family home zoning but you'll want to check that for your specific location for sure), potential noise complaints/issues with neighbors, required permits, annual inspections by the regulatory body, contingency plan for if the neighbor goes out of business/ files bankruptcy, etc. 

It's a lot to take on as your first rental property without a doubt. But it could be both emotionally and financially rewarding. I'd want to learn as much as I could in the beginning, basically the same amount of knowledge as if I was getting into the business myself because that would be the best way to know about all the potential issues and make the risk vs. reward decision from an educated point of view.