Adult Children at Home: Charging Rent vs. Shared Debt Repayment

This guide helps you choose between two distinct financial strategies: the “Landlord Model” (charging rent) and the “Lender Model” (mandated debt repayment). It is not for parents of minor children or those in dire financial straits who rely on their child’s income for survival. Instead, it targets families looking to launch an adult child into financial independence without enabling bad habits.

The Real Decision: Landlord vs. Lender

When an adult child moves back home, the default question is often “How much rent should I charge?” A better question is “Which financial lever needs pulling?” Your decision should hinge on their specific financial health, not just a desire to teach them a lesson. The strategy must match the financial reality.

If your child has high-interest consumer debt, charging them market-rate rent is mathematically inefficient. Every dollar they pay you is a dollar not attacking a 24% APR credit card balance. Conversely, if they are debt-free but reckless with spending, living rent-free often fuels lifestyle inflation-expensive car leases, frequent dining out, and luxury subscriptions-rather than savings.

Option A: The Lender Model (Focus: Debt)

In this model, you waive formal “rent” in exchange for a documented commitment to pay down debt. This is best for children with student loans, credit card balances, or auto loans. The goal here is aggressive net worth improvement.

The Math of Efficiency:
Consider a 24-year-old with $5,000 in credit card debt at 24% interest. If you charge them $500 rent, you gain $500 (which you likely don’t strictly need), but their debt continues to compound at $100+ per month. By mandating that the $500 “rent” be paid directly to Visa or Mastercard, you save the family unit significant money in interest payments over the year.

How it works:
Instead of paying you $800/month, they must prove they paid $800 extra toward their principal debt, above the minimum payment. You aren’t giving them a free ride; you are redirecting their housing cost into their net worth.

• Best for: Children drowning in high-interest debt or those with credit scores below 680.
• The “Paper Trail” Requirement: You must see monthly proof of payment. Trust, but verify. If they miss a debt payment, the “rent” becomes payable to you immediately.
• Tools to use: Use a wealth tracking app like Monarch Money. You can set up a “view only” access to specific liability accounts, allowing you to track their payoff progress without scrutinizing their daily coffee purchases.

Option B: The Landlord Model (Focus: Responsibility)

In this model, you charge a fixed monthly fee. This is best for debt-free children or those who need to learn the reality of fixed expenses. The psychological benefit here is preventing “failure to launch” by making the nest slightly less comfortable.

How it works:
They pay you a set amount on the 1st of the month. The amount should be significant enough to impact their budget but lower than market rate (e.g., $500-$800). You can choose to keep this income or, more strategically, use the “Secret Savings” method.

The “Secret Savings” Twist:
Open a high-yield savings account (HYSA) separate from your main finances. Deposit their rent checks here. When they eventually move out, you gift this money back to them as a deposit on an apartment or a down payment on a home. You can find competitive rates by checking Ally Bank under “Savings Accounts.”

• Best for: Debt-free children, high earners, or those with a history of financial immaturity.
• The Credit Twist: Don’t just take the cash via Venmo. Use a rent reporting service. This turns a family transaction into a credit-building event.
• Tools to use: Platforms like Experian offer tools under “Boost” that allow renters to scan their bank statements for regular payments to landlords (even parents) and have them added to their credit file.

Common Mistakes to Avoid

1. The “Handshake” Agreement

Treating this arrangement casually is the fastest way to breed resentment. Without a written agreement, “rent” becomes “chipping in when I can,” and deadlines slip. You need a signed document detailing dates, amounts, and consequences. This isn’t cold; it’s clear. A lease protects the relationship by removing ambiguity.

You can easily draft a “Family Lease Agreement” or “Room Rental Agreement” using templates found at Rocket Lawyer under the “Real Estate” section. This establishes a landlord-tenant dynamic that respects both parties.

2. Ignoring the IRS “Gift” Trap

Families often stumble into tax complications when trying to help. There are two main areas to watch:

• Below-Market Loans: If you choose to lend them money directly (e.g., paying off their $15,000 credit card so they owe you instead), you must charge interest. If you charge 0% interest on a loan over $10,000, the IRS may view the foregone interest as a taxable gift. You should charge at least the “Applicable Federal Rate” (AFR). You can verify the current minimum interest rates at the IRS website by searching for “Applicable Federal Rates.”
• Rental Income: If you charge your child “fair market rent,” this is taxable income that you must report on Schedule E. However, if you charge a reduced rate that only covers their share of groceries and utilities, this is often viewed as “cost sharing” rather than profit. Always consult a tax professional to ensure you aren’t accidentally creating a tax bill.

3. The “Lifestyle Subsidy”

Charging $200 rent when the child earns $60,000/year and drives a luxury car isn’t helping; it’s subsidizing a lifestyle they can’t actually afford. This is “enabling” disguised as “helping.” Your charge should hurt enough to motivate them to leave, not be so low that they never want to go. A good rule of thumb is to charge 30% of their take-home pay or the market rate for a room in a shared house, whichever is lower.

The Trade-offs

Every choice has a cost. Here is what you sacrifice with each approach:

• If you choose the Lender Model: You sacrifice your own potential rental income and liquidity. You are effectively investing in their balance sheet rather than your own. You also risk them “faking” the discipline if you don’t monitor the payments rigorously.
• If you choose the Landlord Model: You risk slowing down their financial recovery. If they pay you $1,000/month instead of their 24% interest credit card, their debt grows faster than their independence.
• If you choose the “Secret Savings” method: You risk them never learning the pain of parting with money. If they know they’ll get it all back, it feels like a forced savings account, not a bill. Silence is key here-do not reveal the plan until they move out.

Your Checklist

Before they move in (or as soon as possible), complete these steps to ensure success:

☐ Pull the Credit Reports: Have them download their reports from AnnualCreditReport.com. You cannot fix what you cannot see. Look for late payments and total utilization.

☐ Calculate the “Gap”: Determine the difference between their take-home pay and their mandatory debt minimums. This is the “assignable income.”

☐ Draft the Lease/Contract: Create a formal “Family Member Lease Agreement” or “Promissory Note.” Be specific about “Quiet Hours,” guests, and parking.

☐ Set the End Date: A lease has a term. Your arrangement should too. Is it 6 months? 1 year? Set a review date now. Indefinite stays lead to complacency.

☐ Automate the Flow: If they are paying rent, set up an auto-transfer. If they are paying debt, set up an auto-pay to the lender. Do not rely on memory or willpower.

Advanced Tactic: The “Hybrid” Approach

For many families, especially those with children who have manageable debt but low savings, the sweet spot is a hybrid model. Charge a below-market rent (e.g., $500), but require that they match that amount in verified savings or debt repayment.

For example, the “rent” is $1,000, but $500 is paid to you for household expenses, and the other $500 must be shown as a deposit into their own Roth IRA or 401(k). This habit-stacking approach ensures they contribute to the household while simultaneously building their own future security.

Ultimately, the goal isn’t profit; it’s progress. Success shouldn’t be measured by how comfortable they are at home, but by how ready they are to leave. If their net worth is higher and their credit score is better when they move out than when they moved in, the strategy has worked.