Can I rent out a property I do not own?

Question

I am helping my parents move from their house to a condo that we helped buy with them last year. My husband and I are thinking whether we should fix up their old house to rent it out (the house is free and clear estimated around +$600k with market rents in the neighborhood of $2500/month), but it needs work (cracked walls, replace carpet, remodel kitchen/bathrooms).

I am interested in renting out the house after remodeling, but we live 300 miles from the house, and my parents are getting older and do not want to deal with the headache of renting it out, so they are giving us the option to do what we want with it. I was thinking...can I rent it out and collect the rental income for this house if I do not own it? We probably would want to give my parents some money monthly, but am I allowed to put it on my schedule E in order to deduct different expenses?

Joe Villeneuve · Answer

Yes.  Lease it from them, then sub-lease it to someone else.  They get the money you wanted to get to them from the lease between you and them, and you make your cash flow/profit from the spread between the two leases.  It's called a Sandwich Lease.

Dave Foster · Answer

@Priscilla Wong Depreciation as a tax break is another consideration that can dictate  the direction you go here.  The master lease/sublease idea by @Joe Villeneuve and @Nathan G. is a solid idea.  If you're parents are going go receive any money from that then they will have to take depreciation then on that property and it will appear on their schedule E as well (upon sale they have to recapture any depreciation they took or could have taken so watch out for that).

If you go further the route @Corby Goade suggests with a deeding you'll want your accountant to advise on gift tax consequences or use of the one time limitation.  But upon you receiving the deed you would then begin depreciating the asset.

Just a thought but those numbers don't look very compelling as any kind of rental at all.  $30K in gross annual rents before taxes, insurance, maintenance and vacancy allowance on a $600K asset is probably going to net you less than 2% annual return.  And that's if you don't have to hire long distance management and before the costs of rehab.

On the other hand this sounds like your parents primary residence.  If they have lived in it for 2 out of the 5 years prior to the sale of it they can take the first $500K in profit tax free.  I can't see any benefit in giving up that opportunity in order to net a 1-2% return.  I'd encourage you to explore simply selling the house and letting your parents take the tax free exemption.  They could use that money combined with annual gift limits to repay you tax free for the condo investment.  And they could invest the now post tax dollars with you to buy a real estate asset that will provide a superior passive return or be located more convenient for you to be hands on.

Nathan Gesner · Answer

I agree with @Joe Villeneuve. You would establish what I call a "Master Lease" where you essentially rent it from your parents and they give you the authority to "sublease" to a tenant. Contact an attorney and they can provide you with the form to ensure everything is done correctly.

Account Closed · Answer

@Priscilla Wong 600k!? For $2500 rents? If you're already willing to be 300 miles from a rental, I would sell that sucker and use the funds to purchase a wholeeeeee lot of higher cash flow out of state stuff with financing. It wouldn't be any more difficult than what you're doing here, just with a much higher rent to value ratio.

EX: 100k sale price can get you around $1250-$1500 in rents, with 20k down if you use commercial financing.

Mary James · Answer

In my humble opinion, (after spending the last 8+yrs “managing” /co-financing my parents’ home and then their rentals)

I highly recommend helping your parents sell their house & enjoying your non-business relationship with your parents while you’re still able.

Seriously.

Especially if there’s not a lot of profit easily made (& I guarantee you; nothing is easy or cheap in long distance rental reno!)

If I didn’t absolutely love this land,(i now live on the property that i manage & hopefully someday will own...)   I would not have gotten involved financially with my family.  It just makes everything stressful whenever there’s ANY problem.

Ryan Solberg · Answer

Renting a home for anything less than 1% of the value is not great but if you must a leaseback would be your best option. I would rather sell it and buy something closer or better return on investment, preferably both. Call a local real estate agent they may be able the help you out. It couldn't hurt.

Corby Goade · Answer

There the option for them to sign a management agreement with you, where you manage the property on their behalf. If you are keeping all of the profits, just include that in the agreement.

Another thought- if it's 300 miles away and you do not have property management experience, this would likely be a real challenge. If that is the case, you could have them deed the property to you and hire a local property manager to help. Or you could just write up a contract that they are allowing you to oversee the maintenance and management of the property in exchange for a percentage of the profits.

Can I rent out a property I do not own?

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