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 Brad and Angela: Hi Brian, We don’t know if we are typical landlords but tenants missing multiple rent payments are threatening our financial security. We both work day jobs with a combined income that is a little above $225,000 (before taxes). Over the past six years, we have bought six rentals (4 houses and 2 condos). We own one house outright but have mortgages on the other five. Two renters are three months behind in the rent and one is two months behind. Obviously, the drop in cash flow is killing us financially. We’ve gone from collecting monthly rents totaling $8,875 down to $4,200. After mortgages, taxes, insurance, and utilities, we have negative cash flow of about $700 each month. Our rental properties were providing us with an additional income of over $3,000 each month, but for the last several months we’ve been paying out of our reserve fund and that will soon be gone. How do we stop bleeding money before it gets worse?
Answer: Hello Brad and Angela. You’re not alone. Many landlords are really starting to feel the pinch and there is no indication when things will get better. You probably already have, but the place to start is by fully understanding the current rent moratorium regulations covering each of your properties. These definitely vary from state to state and many cities have their own variations. With that information in hand, you need to be in regular communication with your tenants (especially the ones not paying). My suggestion is that you keep the communication positive because we are all in this together.
Something you want to be sure your tenants understand is that this is not rent forgiveness. Unless something changes drastically, they will have to make up all of the back rent. Next, some places allow you to require verification from your tenants that they can’t pay the rent because of an issue related to COVID-19. There is a big difference between a tenant not paying the rent because they are not working at all and not paying the rent because their hours were cut back 25% or they aren’t making much from tips. The latter is a situation where you can probably negotiate for them to pay at least part of the rent. That helps both of you by increasing your cash flow and the tenant won’t owe as much back rent when the moratoriums expire. Additionally, if they cannot provide verification or it doesn’t make sense, some local laws allow you to serve a notice to pay or quit. You still might not be able to evict them but it does send a strong message that you expect them to make a better effort paying the rent. One important thing to do is treat all of your tenants equally in this situation.
If their verification shows they have a drop in income but are still working part-time, the communication should be about making partial payments. And there are other options you can help your tenants consider. One is giving them the option to pay with a credit card (possibly a 0% card). You can encourage this by offering to waive the 3% transaction fee that you will be charged. It will cost you that 3% but it shows that you are willing to work with them. A variation of this is if they can pay part of the rent directly and charge the portion they can’t pay for the month. That also helps the tenant limit the amount that is going to eventually come due.
Another possibility is getting your tenants to commit a portion of any stimulus check that Congress might eventually fund. But we don’t know what Congress will actually do. If you don’t have employees, you’re probably not going to qualify for any new payroll protection program loans (PPP) but they might come up with something for smaller landlords. Also, there could eventually be a program for HUD or FHA backed mortgages.
You should also be reaching out to your mortgage companies. And you should ask if your property taxes can be deferred. Be prepared to share how much rent you’ve lost on the property and a breakdown of your monthly expenses. If you can’t make the full monthly payments, let them know how much of a partial payment you can make. Brad and Angela, you see where this is going; we all need to work through this together. Ask your mortgage companies what options they can help with. Just by reaching out, you might be able to convince them not to declare you defaulted on the loan. They too should have several options to offer. You could begin negotiating a payment catch-up plan for after your rent payments return in full. You could reach an agreement to tack a few missed payments onto the end of the loan. Another variation is a new line of credit to pay other expenses so that you can make the full payment on the original mortgage. There are many creative possibilities.
Eventually, the moratoriums will end. Maybe or maybe not, there will be some standards put in place about how long tenants have to make up the back rent. Current thoughts tend to run towards this being between 6 to 12 months but that can change depending on how long the moratoriums actually last and local regulations. Of course, when your tenants actually return to their previous income level could be very soon or not for a very long time. Part of the communication you should be having right now is how they expect to make up the payments if their income returns next month as well as your own expectations when their income returns. This could make the difference between your tenants starting to make back payments next month or waiting until the moratorium ends.
As a landlord, what are you doing about missed rent payments? Please add your comments.
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].