Long time roommates in house that I own, should I have a lease?

[Ross Slane]

I currently own my home and share it with three roommates who pay me rent. They are all long time friends and like family to me. One roommate has lived with me for 6 years, the other for 4 years, and the third is my brother who has lived with me for about 9 months. It is pretty informal and we treat it as all of us sharing living expenses (split the mortgage cost and utilities with some adjustments for living space and my costs in acquiring the mortgage). We previously shared an apartment, then I bought a house a year ago and we all moved into it. They are all very responsible and never cause any problems or have issues paying rent. My mortgage costs $1100 and they pay me a total of $1150 (I take care of all the utilities).

I am saving money aggressively to afford a down payment on a rental property, probably in the 80k-100k range.

My question is this: Now that I am trying to get into the real estate investing game, will having a formal lease agreement for this make it easier to get financed for my first investment property. 

Also, will it be advantageous as far as taxes go?

[Joe Splitrock]

@Ross Slane not having a written only means you have an assumed landlord-tenant relationship. Not ideal, but the point is you and your tenants still have legal rights. Generally for lack of a written agreement, industry standard rules apply. For example, if they are paying monthly, then 30 days notice to terminate is required by you or your tenant. If they stop paying rent, you need to serve them notice to pay or quit and evict them if they refuse to pay. The point is even though you don't have a lease, you still legally have a tenant. Even your brother who is voluntarily paying you $300 is legally considered a tenant. All the money you collect is legally considered income regardless of if you have a formal lease and regardless of payment method. Venmo may be easier to conceal income from the IRS, but even they have reporting requirements. 

The first reason you want to claim the income on your taxes is because federal law requires you to do so. 

More importantly, claiming the income allows you to claim expenses, interest and depreciation. Most likely you will have a tax loss, which you may reduce your taxes depending on your W2 income. 

You have three room mates so you can claim roughly 3/4 of your home, 3/4 of your utilities, 3/4 of your mortgage interest as expenses. You can also claim similar portion of your home value as depreciation. Then you claim all rent as income. You may also be able to claim portion of repairs or other supplies used in your business. The net result is probably a loss, mostly due to depreciation and mortgage interest. The only thing to be aware of is that deprecation is reclaimed when you sell the home, unless you exchange it into another rental property.

I would consult a CPA to set this up. Ultimately if you plan to invest in other rental properties, it is good for you to start doing things the right way. For that reason, I would even have your friends sign leases, but just month to month. Let them know you are trying to get more professional and turn this into a business. And don't feel bad because renting a room for $400 is dirt cheap so they are getting the friend discount big time.