Renting to Family - Advice Wanted

[Ken C.]

The property is a 5 unit light industrial building. It was built by my father who was self employed as retirement income for him and my mother, who was a stay-at-home mother and also assisted him in his business. One of the units was my father's. That is where he had his office and warehoused his equipment. He passed away in 2016, and at least 5 years priior to that, was incapacitated by illness. 

When he became incapacitated and could no longer visit his unit, approximately 7 years ago, another family member, who had assisted him in maintaining the building, began utilizing the space for storage, vehicle repairs etc. This had been permitted, no one asked him to stop because the unit was in limbo due to my mother not wanting to clear out my father's equipment.  Once my father passed away, my mother said it was time to empty the building. We are getting close to having it ready to rent. The unit has a rental value of $700 to $800 per month.

The family member who has utilized the unit, now would like to become the paying tenant. He would need help, splitting the rent with his son. The family member also has a friend who would use a portion of the building, so three individuals would be paying the rent. I was wondering if anyone had any advice or guidance on his to manage a rental situation like this? I am not a property investor, but have friends who are, and they have told me stories of ruptures within their families because of inter-family rentals gone wrong.

Adding to the mix is the fact that my mother, the owner of the property, is elderly and in poor health. A year ago her physician estimated 3 to 5 years life expectancy. The property will then be owned by me and my two siblings, one of whom is married to the gentleman who wants to rent the building. He basically has had use of the property for the past seven years with no rent obligations. He has also performed maintenance on the property without requesting or receiving  compensation. I think he has finally come to the realization, that the property is income for my mother, and he will need to either become the tenant or vacate the space. Not sure of how my mother's eventual passing, will change that, but I anticipate that he might feel that her passing eliminates the need to generate income from that unit, and he can resume a rent free status. At that point, any collected rent will be then be going to me and. my two sisters, so why would he in essence, pay rent to himself?

I do not mind if he wants to use the space. One sister would rather have a non-family member single tenant in the space, and my second sister, the potential renter's spouse, was not too enthusiastic about the idea. As I said, I can see where this might be a situation where if the property is not sold when my mother passes, the family tenant may feel he no longer needs to pay for the space because his spouse is now one of the owners' and that would be in essence, writing a check to himself.

Does anyone have any advice/recommendations on how to best proceed? My goal would be to avoid the family issues my two friends experienced when they rented to family members.

[Colleen F.]

I can speak from personal experience here. Get it in writing whatever you decide. Also dont trade work for rent. I would set it up as a partnership but you have to look at inheritance implications. 100% moms now and equal % at death if you will keep it. As far as rent, market rent, but he is a tenant and you have to treat him like a tenant AND the unit like a rental. That means if your dads stuff is in the unit and and he starts renting it that stuff is moved or it is his, make a choice. Entry is like a tenant unit. This can get messy but while mom is alive you have to do it her way. good luck.