Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Ken in New Jersey: Hi Brian, Reality is starting to set in that my tenants aren’t able to pay the rent. I have three rental condos. One didn’t pay the rent in April and now the other two have missed the May payment. I shook off the missed April payment with the expectation that things would get better by now. Obviously, the situation has gotten worse. I think of myself as a conservative investor because I have a two-month emergency fund that I used part of to cover the mortgage payment when my tenant missed the April rent. Now, I’m rethinking the situation. For my own financial stability, I don’t want to spend the remainder of my emergency fund when I don’t know if I’ll be receiving any rent payments for the next several months. I’m not blaming anyone for the situation we are all in but it is starting to hurt me financially. I’d like some information about how to maintain good working relationships during these tough economic times.
Answer: Hi Ken. These are unprecedented times and everyone is going through a learning curve. The first week of May was a wakeup call for many landlords when missed rent payments became a stark reality without a clear picture of when things will improve. But you appear to have a positive attitude about figuring out how everyone can work through this together. As a landlord, you’re in the middle and need to maintain good relationships with both your tenants and your lender.
Ken, you probably already know about the New Jersey eviction moratorium that began on March 19 and will last until two months after the governor declares an end to the COVID-19 health crisis or he issues another executive order ending it sooner. Something else you need to be aware of is that tenants in homes where the owner has a federally backed mortgage (or tenants in public or subsidized housing) may be entitled to protection for a longer period.
Importantly, the eviction moratorium does not forgive missed rent payments. These payments will need to be made up sometime in the future. Government authorities may give some guidance such as the amount of time to make up past due rents but I’m not aware of any guidance at this time. What you should be doing now is documenting any missed payments and irregularities as they occur. The place to begin is with a letter (or email) to your tenants acknowledging the pandemic has thrust your community into unknown territory. The letter should ask them to notify you in writing of the substantial loss of income due to the COVID-19 pandemic and that they are unable to pay rent. If you are aware of any programs helping with rent payments, mention that you would like to discuss these with your tenants.
The letter should also request a discussion about future alternative payment arrangements to accommodate the situation. Any agreements coming out of the discussion should be documented in a payment plan agreement. The payment agreement needs to include the names of all people on the lease, the address of the property, line items for each missed payment, and the date it was originally due. Another section of the agreement documents when makeup payments will be made. Makeup payments will probably need to be spread over time. There should be a line item for how much each payment will be and the date that it will be made. Also, the original letter should include a sentence or two reminding them that if they are not currently facing a COVID-19 related hardship, please continue to pay rent as usual.
Ken, property owners that are having problems making loan payments should also be contacting their lenders. This situation will unfold further with time but most lenders aren’t likely to enter into forbearance unless absolutely necessary. You can expect your lender to ask for collection records and proof of hardship. This is where your documentation with tenants will be helpful. With that said, Freddie Mac has already announced a forbearance program for its borrowers and many other lenders have followed suit.
You might also think about taking a play from commercial property landlords. A creative solution on the commercial side is lease extensions with favorable terms in return for some certainty of payment from tenants. This can be a win-win for both in this unpredictable situation. This can work well if your tenants have a history of paying on time and are maintaining your property. You could benefit by extending leases as a guardrail against the possibility of vacancy rates increasing in the coming months as a result of COVID-19. The tenant benefits by knowing rent won’t go up immediately after the current lease expires.
At the end of the day, it’s important to remember that the residential real estate market has not become fundamentally flawed overnight. The current situation is mainly due to external market forces rather than fundamental issues with the real estate economy. It’s just one of many sectors of the economy needing to work together for the best possible outcome.
Please comment on how you are dealing with delayed rents at this time.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].