COVID-19 Impact: What’s Next For Landlords?

BY CYNTHIA MEYER CFA®, CFP®, CHFC®

CONNECT ON SOCIAL

Are you worried about the impact on COVID-19 on your rental real estate investments? Rental property owners face new and significant business challenges due to the impact of COVID-19. I want you to be proactive and prepared to take practical steps to meet those challenges. Those landlords who are financially and strategically positioned to weather the stormy months ahead will survive this economic crisis with stronger businesses.

Don’t argue with reality

As a rental property owner, you need to continue to pay your mortgage, taxes, insurance, and maintenance whether your tenants pay you in full or not, or risk damaging your personal finances. You may have to fill a vacancy without making direct contact with a new tenant. You will have to find a way to conduct repairs and routine maintenance. Even some of your most reliable, responsible tenants may face economic hardship which impacts their ability to pay their rent or utility bills.

Ruminating, blaming, venting on social media, or wishing it were different isn’t going to make it different. This is reality. Start thinking now about how you plan to handle COVID-19 related challenges in your rental property business.

#1 - Tenants who do not pay their rent

Research estimates that one third of all tenants did not pay their full April rent on time. Some did not pay because they had lost all sources of income and did not have sufficient savings to cover their bills. Others may have rent funds available, but because of the eviction moratorium are holding on to that money to make sure they can feed their families until income comes in again. As the stimulus and unemployment payments arrived, tenants began to catch up.

In the pre-COVID-19 world, your leases determined the process you could choose to implement if a tenant did not pay their contractually agreed rent. You may have been strict and unwavering, filing eviction notices as soon as legally permitted. Or you may have been more flexible and understanding, working with tenants facing unexpected financial hardship to implement rent modification agreements (that is what we practice in our rental business).

Whichever method you used to handle this before, there is a new normal now. Rental property owners should strengthen their cash reserves so they can weather uneven or missing cash flows.

#2 - Tenants who ask for rent relief

Your tenant may proactively request rent forgiveness or a rent reduction. They may be out of work, still waiting on unemployment compensation – and like most Americans have little in emergency savings.

Plan now for how you will handle requests for rent relief, so you have a policy which is fair to all your tenants – and to your personal finances. If you are willing and financially prepared to offer some type of rent relief, make sure you model the impact of on your financial position and that you will still be able to pay the property expenses. Think of rent relief as a contribution similar to a charitable contribution – do it voluntarily and because you want to help.

Most rental property owners do not have the luxury of considering rent forgiveness. They rely on rent payments for their own income to feed their families, and to pay the property’s mortgage and other expenses. I am seeing most rental property owners respond to tenant requests for rent relief with rent modification agreements that permit the tenant to pay the past due rent in additional installments over the term of the lease. However, as the economic fallout from the pandemic continues, those property owners who have fewer cash reserves to weather unpaid rents are at the biggest personal financial risk.

#3 - Temporary halt to evictions

Most states have implemented a moratorium on evictions for non-payment of rent during the pandemic (see list). The CARES Act paused evictions for most residents of federally subsidized apartments and renters in homes covered by federally backed mortgages (FHA, Fannie Mae, Freddie Mac) for four months. I expect renter protections to be extended beyond their original dates.

Tenants who can pay their rent should pay their rent, or as much as they can. The pause on evictions does not mean that tenants are released from legal responsibility for paying their rent later. As a financial coach, I encourage renters to continue to pay as much of their rent as they are able. That way they do not face a gigantic payment when the moratorium is lifted and the risk of an eviction following them on their credit.

Small property landlords would not want to evict a tenant during the pandemic, but they are growing increasingly worried about the ripple effect of long-term non-payments. Your tenants may not understand that the rent they pay goes to paying your mortgage, taxes, services, and maintenance, and is part of the income you use to take care of your family.

Communicating clearly with tenants is essential so everyone is aware of their rights and obligations. Keep good records of all communications with tenants. Know your state and municipal rules and make sure you follow them.

#4 - Unpaid water, garbage, or utility bills

Most states have and paused utility shut-offs due to non-payment. It is a temporary pause, not forgiveness, of the amount owed. There is a risk that the tenant who does not pay a water or garbage bill will accrue a large unpaid balance which gets added to your property taxes or as a lien on the property. Those services could be withheld from your next tenants if left unpaid.

There is also a risk that a tenant who leaves a large gas or electric bill unpaid will eventually get shut off after the crisis abates. This can create headaches for you as well as the tenant. While you are not generally going to be responsible for a tenant’s electric or gas bill in their name, you may have to put down a deposit to transfer the service without interruption during a vacancy.

Keep the lines of communication open with your tenants about any financial difficulties they are facing. Encourage them to tell you if they are facing financial hardship. If tenants can’t pay the water or garbage bills that they are responsible for in the lease, it may be better that you pay those services, document the situation, and withhold the funds from their security deposit when they move out.

#5 - Possibility of rent strikes in big cities

Millions of people in America right now are suffering from significant financial stress. Tenants’ rights groups and grassroots community groups have issued calls for local and national rent strikes, and the idea has taken root in big cities where people already pay a high percentage of their income in rent. Local officials and federal legislators have proposed legislative remedies.

I am not an attorney, but it seems unlikely that rent could be “cancelled”, or that rent-striking tenants would be able to forgo paying rent and still occupy the rental property in the long run. However, this political movement plus the effects of the recession could lead to new rent control initiatives and changes in local landlord/tenant regulation.

Consider joining your local rental property owners’ organization or real estate investors association. They can provide valuable resources and education on how to navigate landlord-tenant issues in this difficult environment. An advocacy association can also connect you to your local, state, and federal representatives to comment on potential new rental housing laws.

#6 - New challenges for completing maintenance and repairs

Rental property owners continue to defer non-emergency maintenance and repairs, but that cannot last forever. Little problems become big problems if you do not fix them. A landlord has the legal responsibility to keep their rental property fit for habitation and must comply with the terms of the lease.

Landlords are stuck between a rock and a hard place: to do work on the rental property, the landlord or the contractor must be on site. Tenants may be understandably skittish about letting a handyman – or you -- into their home while they are practicing social distancing.

Depending on the location and the level of local shut down, you may be temporarily restricted from working on the property and require a permit to conduct what would be normal repairs. Some tenants may be understanding or even okay with that. Others may be angry that you cannot immediately fix the dishwasher or the garage door. Focus on frequent, clear, empathetic communication with tenants so everyone understands what you can and cannot do and when you will do it.

#7 - Tenant retention strategies

Retaining responsible tenants who pay their rent on time is an important part of any rental property business – and is even more important now. Even if you have always rented your vacant units in a few days, you may experience longer periods of vacancy. The best way to avoid that is to retain your existing good customers.

Landlords will be looking to tenant retention strategies including:

Renewing leases without previously scheduled rent increases
Offering rent discounts in some areas
Multi-year leases, with lower rents in the first year and increases in later years
Tenant-requested upgrades such as painting, new fixtures, closet system, landscape work or a dishwasher – to be completed when work is permitted again
Energy efficient improvements

#8 - Paying expenses with uncertain cash flows

Rental real estate businesses face less predictable cash flows, both in timing and amounts. The longer the pandemic continues, the more likely it is that some tenants will not be able to pay their rent. Many landlords have just one or two units, which means they have high rent diversification risk. Those landlords who have inadequate cash reserves are the most susceptible to damage to their personal finances.

To maintain their rental properties when tenants are not paying on time or in full, rental property owners without sufficient reserves may be forced to access savings meant for other goals (such as retirement), home equity or high interest loans. Others may be compelled to sell investment properties that they cannot afford to maintain (a distress sale) if rents are late or unpaid. Landlords who seek mortgage forbearances and modifications may find that this affects their ability to refinance or borrow for new properties.

Rental property owners can build up their short-term cash reserves now to weather uneven or missing rent payments and protect their personal finances. I encourage landlords to build reserves and sources of liquidity that could cover a full year of a property’s expenses in case of vacancy, non-payment, or natural disaster.

Some ideas to manage cash flow risks include:

Save all net rents (rent – mortgage, taxes, insurance, and expenses) in your operating account until you have a full year of building expenses.
Home equity line of credit (HELOC) on one of your rental properties
Rent guarantee (rent default) insurance which covers you if one of your tenants stops paying rent
Offer tenants easy ways to pay their rent online, by credit card and even in installments if needed.

#9 - Protections for mortgage borrowers in the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act established protections for homeowners with federally backed mortgages. This includes mortgages on homes used as rental properties that are backed by FannieMae or FreddieMac. According to the Urban Institute, this covers 12.4% of single family and small multi-family (2-4 units) rental properties and 48.7% of multi-family properties.

Mortgage relief includes:

Your lender or loan servicer may not foreclose on you or initiate foreclosure for 60 days beginning March 18, 2020.
You may request a forbearance (temporary pause in payments) from your loan servicer for up to 180 days if you have been adversely affected the coronavirus pandemic, with the option to request another 180-day extension. Your claim of pandemic-related financial hardship is all that is needed to request the forbearance – further documentation is not required. Loan servicers may not add additional fees, penalties, or additional interest to your account above scheduled amounts.

Investment property owners with federally backed mortgages must pause evictions. This is defined in two ways:

Evictions of renters living in single-family and multifamily properties with federally backed mortgages are halted for 120 days after its enactment, whether or not the landlord receives a forbearance of mortgage payments.
Evictions of renters are paused for those multi-family borrowers who receive a forbearance, for the duration of the forbearance (up to 90 days.)

Borrowers who do not have federally backed mortgages may have relief options and should contact their mortgage loan servicer.

Note that a forbearance is a temporary pause or reduction to mortgage payments, NOT forgiveness of the payments. You will be required to make up those payments in the future. The type of loan you have determines your options, which range from making the payments in a lump sum, making increased monthly payments until the mortgage is current or adding additional payments or a lump sum payment at the end of the loan. Read this Consumer Financial Protection Bureau guide to forbearance before contacting your loan servicer.

#10 - Relief for businesses in the CARES Act

The CARES Act also provides relief to small businesses in the form of loans, loan forgiveness, grants, and tax relief. Demand for relief was high and the first round of funding for major loan and grant programs was quickly exhausted.

Paycheck Protection Program

The PPP is an SBA loan to small businesses designed to help them keep their workforce employed during the coronavirus pandemic. SBA will forgive a PPP loan if all employees are kept on the payroll for eight weeks and the loan proceeds are used for payroll, rent, mortgage interest, or utilities. The initial rollout of the PPP was bumpy, and the program ran out of funds quickly before many small business owners could successfully apply. Congress refunded the program and it has reopened as of 4/27/20. SEE Paycheck Protection Program FAQs.

Economic Injury Disaster Loan Program (EIDL)

This SBA program offered loans up to $2 million to small businesses (500 or fewer employees, including sole proprietors and independent contractors. EIDL loans are based on size/type of business, with repayment ranges up to 30 years. Business owners must apply directly to the SBA – however the loan program closed its portal April 15 due to overwhelming demand. Applications submitted before then will be processed on a first come, first served basis. New applications are being accepted for agricultural businesses only at this time. See this National Association of Realtors infographic for a comparison of the PPP and EIDL.

EIDL Grants

The CARES Act also created emergency grants of $1000 per employee (up to a max of $10,000) to any business which self-certified that it was eligible for an EIDL loan. The SBA recently limited the EIDL advance to agricultural businesses only. EIDL grants reduce the amount of forgiveness of any PPP loans.

Employee Retention tax credits for business not receiving PPP or EIDL

The credit is a fully refundable credit against an employer’s payroll taxes for wages paid from March 12, 2020, through December 31, 2020. It is limited to 50% of eligible wages paid to each employee, up to max of $10k of wages/person. Employers must have experienced a full or partial suspension of operations or substantially reduced revenue due to COVID-19. Self-employment taxes are not eligible for the credit. See IRS Guidance.

Employers can defer the employer portion of 2020 payroll taxes

50% of the employer portion of taxes is due 12/31 of 2021 with the remainder due 12/31 of 2022. This applies to both to businesses with employees and to self-employed individuals. Note that “employee” portions of payroll taxes must still be withheld and paid on time. While this may provide temporary relief, there is a risk that the employer will not be able to pay deferred taxes later when they are due, so use caution. See IRS Q&A on payroll tax deferral and your tax advisor.

Change in Net Operating Loss (NOL) Rules

Rules have been expanded for net operating losses carry back period. See IRS guidance on NOL changes and your tax advisor.

#11 - Virtual tours

Landlords and property managers who create marketing video tours of their available rentals will have an advantage in the rental market. Tenants are doing more research online, narrowing their choices for live tours to a few top choices. If you do not have a compelling online listing, your property could get passed over.

This is an area where there are great tools to do it yourself. It is not hard. I use Animoto in my business to make videos with photos and video clips I’ve taken on my phone. I add music and my brand colors, then get them captioned using Rev. Other easy-to-use video production tools include iMovie and Lumen5.

Film yourself doing a walk-through of the property, describing different features. If that is not practical, use your photos as part of an animated slide show video. Create an animated slide show video in PowerPoint using your photos and save it as an .mp4 file.

#12 - Self-guided showings and remote rekeying

Showing your vacant unit yourself has advantages but may not be practical with health concerns or travel restrictions that make it hard to get to your out-of-state property. Landlords are turning to services such as Rently and TenantTurner to facilitate prospective tenants taking self-tours of vacant properties.

Typically, this involves installing a combination lock box or smart lock on your property that allows the prospective tenant to get in with a code. Applicants are pre-qualified before giving them the code with an online application and screening process. Landlords who are going the DIY route can install the smart box/smart lock themselves and give the applicant the code after they have been screened.

Many property owners have asked prospective tenants to voluntarily cooperate in protecting each other, by encouraging them to:

wear masks
wear shoe covers which are provided (or take off their shoes); and
leaving out hand sanitizer.

They are also scheduling professional deep cleanings prior to the tenant taking occupancy and leaving the unit vacant for several days in between tenants to minimize risk.

Many rental property management apps facilitate tenants signing leases electronically. You can also send documents via DocuSign or similar service.

#13 - Massive changes in business strategy for Airbnb and vacation property hosts

The short-term rental market collapsed virtually overnight with the coronavirus pandemic. Some forward-thinking short-term rental hosts in the NYC area where I live pivoted quickly, offering their properties as rentals for healthcare workers and first responders, or to people who needed to self-isolate away from their homes.

There’s anecdotal evidence that Airbnb and vacation property owners are rethinking their overall strategies to make sure they have rental income to pay their investment property mortgages. Owners of short-term rentals are returning their units to the long-term rental market. Others are turning to house-hacking strategies that do not require extensive personal contact, such as renting a property as a remote office or renting the driveway to someone to park their RV.

As shelter in place restrictions lift and people can begin to venture out, it will be a long time before the short-term rental market is robust again. I see opportunities for those short-term property owners who:

own destination properties, such as single-family homes with pools or self-catering rentals near open parks, recreation areas or beaches. People are likely to be quite reluctant to travel via airplane and restart some travel with road trips to destinations where they can maintain physical distancing and still have a change of scenery.
market directly to a specific niche, such as traveling nurses
implement and publicize a clear policy for keeping their units clean and sanitized. Airbnb, for example, is developing a new cleaning protocol
pivot to the long-term rental market, possibly offering their property as a furnished rental or all-inclusive rental (rent + utilities).

#14 - Higher rent risk priced into investment property sales

Investors who make offers on investment properties during the recession will have to account for higher rent risk factors in their financial analysis. There is not yet a consensus on how to price this into the future value of cash flows of an investment property.

“Rent risk” includes more than just a risk of vacancy. For a new investment, it also includes accounting for situations such as:

A tenant cannot or does not pay rent, water, or garbage for an extended period of time, and there is a continued moratorium on evictions.
An existing tenant who has given notice does not move out – and you have someone with a signed lease ready to move in.
Tenants in a multi-family property withhold rent due to dissatisfaction with deferred maintenance (which you may legally be prohibited or unable to complete during the pandemic).

#15 - New real estate opportunities for those with cash

Those investors who have cash reserves, other sources of liquidity and reasonable credit may take advantage of opportunities in this recession to build their real estate portfolios. We bought most of our rental properties during the last recession (see the story here). During the boom years leading up to that recession we focused on building our savings, so when opportunity knocked, we were ready.

While no one has a crystal ball – and certainly no one wishes financial hardship on anyone - watch for rental property investors who discover opportunities in:

Distress sales – Every market downturn includes opportunities for those who have the resources to make smart purchases and wait for a recovery. Some property owners have entered the recession with too much leverage and too little cash reserves and will need to sell quickly. As the terrible fallout from the pandemic makes its way through the economy, other properties will become available as pre-foreclosures and short sales.

The 1 percent rule – An income property that has a monthly rent of 1 percent of your purchase price or higher is likely to have positive cash flow after mortgage and expenses. Over the past few years as real estate prices have risen, this ratio has been harder to achieve. However, I expect that “one percent deals” will be easier to find, especially for investors who can move fast because they do not require a mortgage contingency.

Lower rehab costs – If there is a prolonged economic downturn, construction costs may fall as contractors face slowing demand. Initially, however, construction and rehab costs could remain at pre-pandemic levels as work resumes on projects paused by the shutdown.

Vacation properties – It could be several years until travel resumes at pre-COVID-19 levels. Vacation property owners who are over-leveraged or who cannot afford to ride out a long downturn will exit the business. This will create opportunities for entrepreneurs who can afford to use the property for a different business model (such as long term or corporate rentals) or who can afford to wait out the recession with an unprofitable vacation rental.

#16 – Prioritization of risk management

Income property owners will work to reduce the overall financial risks in the day-to-day operations of their rental businesses. Those who are able will add investment risk strategically with the purchase of additional properties that diversify income.

Risk management practices include:

Removing risk by selling income properties which are not profitable.

Reducing risk by diversifying rental income portfolios, refinancing high interest loans to a lower rate, building cash reserves, signing multi-year leases, and improving tenant communication practices. Multi-family owners will implement policies for the COVID-19 era for using common spaces, paying rent online and handling maintenance.

Controlling risk by measuring key financial metrics, setting lower leverage targets, maintaining substantial cash reserves, and identifying additional sources of liquidity (such as a HELOC).

Insuring against risk by updating landlord policies, expanding umbrella liability coverage, reviewing personal coverage, and requiring tenants to carry renter’s insurance.

#17 – Pauses or disruptions to renovations and rehabs

Most states categorized renovations, rehabs, and other construction projects to be non-essential. As of this writing some states have slowly allowed these projects to resume, but many areas remained stuck in renovation limbo.

Financial losses - Rental property owners with incomplete and paused projects have incurred financial losses. When projects resume, they will stretch even longer than planned due to delays in materials and competition for contractors’ attention.

Projects postponed or canceled - Real estate investors may postpone new renovations and rehabs until they can better predict when they can complete the project. Others may cancel them entirely, due to financial concerns.

Scheduling challenges - Contractors face challenges of completing work scheduled to begin in spring and summer, while finishing projects which were halted during the shutdown.

Tenant resistance - Even when state and local governments have cleared contractors to resume work, tenants may be resistant to having strangers on site. Landlords will need to communicate and work with tenants to develop solutions that keep tenants and contracts protected.

#18 – Lower mortgage rates and refinance opportunities

Mortgage rates are currently exceptionally low and many real estate investors are asking if now is the right time to refinance their debt.

If the new mortgage rate is 75 basis points (0.75%) lower than your current rate that it is generally going to be worth it to refinance after the costs of the refi. Remember to put that in context of your circumstances, including:

How many years are left on your loan
How long you plan to own the property
If you plan to take cash out during the refinancing
If the property is worth about the same or more than when you purchased it.

If you are considering a refinance, start now to compare numbers and give yourself plenty of time to close your new mortgage. Rates dropped quickly, and mortgage lenders were besieged with new applications. Depending on where the property is located, there may still be restrictions in getting an appraiser in to view it.

If you’re planning to own the rental property indefinitely and would like to pay off the mortgage to increase cash flow, run the numbers to see if it makes sense to refi from a 30 to a 15 year mortgage as well. You may be able to pay around the same every month and get the mortgage paid off a lot sooner, with lower total interest costs.

It is also a good time for rental property owners to evaluate a refi of their primary residence. That same 75 bp spread applies as a general guideline.

#19 – Higher standards for investment property loans

Expect mortgage lenders to increase underwriting standards for new mortgages. Banks expect more late payments and higher default rates due to the economic crisis.

Mortgage trends include:

Borrowers with good credit scores (760 or higher) and debt to income ratios are still likely to get loans approved quickly but may have requests for more income and asset disclosures during the underwriting process.
Down payment requirements for investment property mortgages are increasing towards the higher end of the range (25 – 30% of property value), especially for those with moderate credit scores.
Banks issuing FHA loans are raising their minimum credit scores from 580 to around 660.

7.54% percent of mortgage borrowers so far have asked to be put into forbearance plans – 3.8 million homeowners -- according to the Mortgage Bankers Association. A Covid-related forbearance does not affect your credit score. However, it is likely to affect your ability to refinance a loan or take a new mortgage until the amount forbeared is paid off.

#20 – Turn towards professional financial planning advice

A recent Nationwide Retirement Survey found that one quarter (24%) of American adults were seeking financial advice for the first time due to the coronavirus pandemic.

When seeking financial planning advice, consumers - including real estate investors - are increasingly turning to Fee-Only CERTIFIED FINANCIAL PLANNERS™ who are fiduciaries. Fee-Only planners are legally obligated to work in the best interest of clients, and do not sell financial products, receive commissions or brokerage fees. They are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets.

Real estate investors are typically more hands-on investors, and passionate about real estate. They want an advisor who understands their financial concerns, is knowledgeable about investment property businesses, and is supportive of their real estate goals.

Investors with most of net worth in real estate can seek guidance from a real-estate savvy Fee-Only CFP® who works on a subscription, retainer, or hourly basis, as opposed to the traditional “assets under management” model. Regardless of fee model, look for a Fee-only CFP® who has real estate investing experience.

If you have a topic you would like us to tackle on The Real Life Blog, we would love to hear from you! Please email us at info@realifeplanning.com.

This blog is for general financial education purposes. Information contained in this blog should not be construed as financial, tax, real estate, legal or investment advice. For educational purposes, blog posts may contain links to other websites which are not under the control or and are not maintained by Real Life Planning. Real Life Planning has provided those links for your convenience but does not necessarily endorse all the material on those sites. Please consult your financial, real estate, legal, or tax advisor for advice specific to your situation.