Advice - House Hacking with Friends. Treat as tenants?

Question

Hey BP members. Would appreciate some insight here. I have the ability to buy a 2-3 bedroom home where I live in Phoenix AZ. I have a few friends that would want to be my roommates and pay a fair, market rental rate for the home I buy split up between us. I am wondering if I should treat them as I would any other tenant such as asking for Security Deposits, Signing a formal lease agreement w/ terms, verifying their incomes (to make sure I can get paid and friendship doesn't go sour) and holding up the lease agreement? Anyone else have experiences house hacking with people you know? How did you handle that? Much appreciated!

Cassi Justiz · Answer

I house-hacked with roommates and I never did have any sort of formal agreement. I never had any issues, but I was lucky. Not everyone has that experience. If I were to do it again I absolutely would have leases in place and security deposits on hand.

One of my college roommates told me her current situation (she's now renting from someone with a background in real estate), and it's 100% what I would recommend. Every roommate has a written yearly lease and a security deposit on file. They pay a flat monthly rent rate that includes utilities but they also have a monthly (and mandatory) "house contribution" that is paid at the same time as their rent. The "house contribution" goes to all communally used items such as trash bags, dish soap, toilet paper, laundry detergent, coffee, etc. This fund also goes to pay for general maintenance and upkeep items like air filters, light bulbs, and any other non-cap ex expenses. Any one of the roommates can buy items for the house and ask for reimbursement from the "house fund."

Paul Welden · Answer

YES! Treat them as tenants. May not need/want to "credit qualify" them, but definitely have a written agreement for rental/leasing.

Colleen F. · Answer

Yes definitely,  make it a rental agreement that requires renters insurance.  It solidifies expectations.  It could be month to month so you can decide if it is not working out to terminate the arrangement more quickly.  I also would  make sure that you have similar standards in how clean you are. If you don't have similar standards don't live with them or roll a cleaner into the rent.  The house fund is a good idea if you will share the costs for paper products and such.

Make sure you establish house rules outside of the lease about visitors and such. You don't want to change the lease for each house rule change.  A general reference in the lease to major items and a reference that they agree to abide by other house rules which may change from time to time. Keep in mind you cannot anticipate every situation.

You say a fair market rent and divide it between us but really if you buy the house you would be charging them a  fair per room rent. You take on the house liability and capital expenses. You also take the risk if one of them leaves.

Pamela Sandberg · Answer

You should also protect yourself with plenty of homeowner's insurance coverage and possibly putting the house in an LLC/trust. Requiring renter's insurance can also help protect you from claims of damaged property.

Sebastian Roy · Answer

@Cassi Justiz I really like your point of the house contribution fund and will certainly implement that into my future house hack if I use roommates. Thank you!

Dillon Y. · Answer

@Braxton Palmer

Yes.

...and I could leave it at that, but I'll expound.

Why wouldn't you use the same processes and safeguards?  Is the concern that your friends would find it insulting?  How long have you known them?  How much do you trust them?  Would you leave your kid with them unsupervised?  Your dog?  How about a 2-3 bedroom home in a market where that likely equates to an asset worth roughly $350,000?

I have a close friend who is 23 years old and about a year removed from the military who is renting two of the bedrooms in the home he owns to friends.  He is a disciplined man coming to grips with the fact that a lot of his friends do not have the same respect for others or the same values.  He has already had to void the lease renewal for one tenant/friend who could not maintain clean standards and has just renegotiated a significant price increase for the second tenant/friend who is falling into the same issue - can't clean up after his dog, clean his bathroom, etc.

The point is, without a lease to use as leverage, my buddy would be SOL and left to his own devices to negotiate with the neanderthals he got into bed with.  The point IS being friends with folks or spending a long weekend with folks is vastly different from (and you'll see a very different person when) living in close quarters with someone the next 6 months, year, or two years.

Unless those folks have ownership in your property, they will never be properly incentivized to care about the home in the way that you do.  The best incentive you can create is a lease.  Use one.

Paul Welden · Answer

@Braxton Palmer because you are a licensed real estate agent, you are held to a higher lever of accountability than those who are not licensed.

Protect yourself (and your friends) by having all rental/lease agreements in writing.

Ryan Swan · Answer

@Braxton Palmer definitely sign a formal written lease that covers all terms like monthly rent, security deposit, any non-refundable charges, and a breakdown of who pays what utilities.

Colleen F. · Answer

Yes definitely,  make it a rental agreement that requires renters insurance.  It solidifies expectations.  It could be month to month so you can decide if it is not working out to terminate the arrangement more quickly.  I also would  make sure that you have similar standards in how clean you are. If you don't have similar standards don't live with them or roll a cleaner into the rent.  The house fund is a good idea if you will share the costs for paper products and such.

Make sure you establish house rules outside of the lease about visitors and such. You don't want to change the lease for each house rule change.  A general reference in the lease to major items and a reference that they agree to abide by other house rules which may change from time to time. Keep in mind you cannot anticipate every situation.

You say a fair market rent and divide it between us but really if you buy the house you would be charging them a  fair per room rent. You take on the house liability and capital expenses. You also take the risk if one of them leaves.

Advice - House Hacking with Friends. Treat as tenants?

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