A new survey found that more than 50 percent of renters reported being unemployed last month — a discovery that suggests that the economic chaos has in many cases fallen first on the shoulders of people living in property that someone else owns. The entire country, it seems, has been bracing for the moment when millions of unemployment claims translates into millions of unpaid rent checks. And while April 1 represented the first potential pressure point, there are likely to be others.
Tenants Still Need to Pay Rent!
Media is saying don ‘t have to pay, But even if evictions are suspended, renters are still on the hook for their monthly rent payments whether or not they can afford them.
Tenants still have to pay rent because there are currently no federal or local measures freezing rent or waiving rent payments entirely. Even though we have a eviction moratorium in VA, landlords will still be able to ask for unpaid rent when the coronavirus emergency is over. “The real issue is what happens after any moratorium has ended,
There is no law preventing landlords from reporting late or missed payments to credit bureaus. The major credit agencies are dealing with coronavirus like a natural disaster. Late or missed payments will be flagged to future lenders with a natural disaster code indicating the borrower isn’t at fault so their credit score isn’t harmed, the Wall Street Journal reported.
Options for working w/ Tenants During COVID-19
Remember the reason most people rent is because they don’t live fiscally responsible lives so you have to be doubly responsible. Renters tend to earn less than homeowners, resulting in less savings. And they often work hourly jobs that are quick to be cut in economic recessions. Paying back several months of rent all at once is an impossible task for many who’ve lost jobs. And even when the virus is under control and businesses can reopen, renters may still be looking for work. “The hopes that everything will pick up quickly when the pandemic ends aren’t necessarily realistic,”“I don’t believe the economy will immediately start up again and everyone who had a job will suddenly have a job again.”Some small businesses may never reopen. So you need to figure out how to work with your tenant. What is reasonable and how can you implement that?
The most important thing is to have a plan—- if this, then do this…..
Options to offer when they make the call so you don’t get caught off guard and stuck in your emotions.
- Remind them rent is still due
- What can you pay?
- Can you use one of your credit cards to pay? Payments can be made via Paypal or Venmo.
- Raise future rent to cover missed payment(s) instead of trying to catch up from lump sum
We’ve heard other landlords have been offering tenants more time. Most mortgages are not officially late until the 15th of the month, if you give your tenants the extra days to pay, it increases your chances of collecting the rent.
Another idea is to offer your tenants weekly payments instead of monthly payments. Instead of having a huge chunk due every month, maybe tell your tenants they can pay weekly instead. Divide the rent into 4 weekly payments. Tenants might be able to handle the smaller weekly payments easier than monthly payments for the next couple of months.
You could also credit the tenants the money temporarily up to the amount of the security deposit and try to get the tenants to make it up later. Worst case scenario, you can keep the security deposit if they are unable to make up the credit.
Most importantly: Be prepared. Answer with operating procedure instead of emotion.
What to do if You Can’t Pay Your Mortgage During COVID-19
The two most important things right now are cash flow and paying your mortgage, but what if you don’t have the cash flow to pay your mortgage?
Look at all of your expenses not just your business expenses. Can you cut out any software packages that you don’t use anymore? Call your gym to see if you can take a membership break during the quartnine. Add up the savings that you are earning just from staying home… Do you normally eat out a lot each month, will you save that money this month? Are you saving money on hair cuts? Anything you can cut from your expenses during quarantine can be applied to your mortgage.
Do you have any relief coming your way? If you made less than 99k when you filed your taxes, you could qualify for the government relief check. Can that be applied to your mortgage?
If you haven’t paid your 2019 taxes yet, remember that deadline has be extended to July 15th. If you have money set aside to pay those taxes, then can you temporarily tap into that money to pay your mortgage. If you are expecting a tax return, then file your taxes as soon as possible and potentially use your refund check to pay your mortgage.
Not all landlords are created equally. Some of us may have strong balance sheets and cashflow giving us the luxury to be able to make decisions around how to work with our tenants to provide them with relief. Conversely some of us may be relying on on rents to help us get by and pay our mortgages. We really don’t have much wiggle room to provide tenants with relief. If you fall into the latter camp, have an honest conversation with your tenant. Let them know that you are not a wealthy real estate mogul and that you’d be in a really tight spot too if they didn’t pay. Remind them that if you end up losing the property, then they could also lose their home.
If can’t pay mortgage, get to the bank before the payment is due. Ask about a loan deferment. Fannie Mae and Freddie Mac, the 2 government sponsored agencies that own most of the countries mortgage debt, recently announced a payment deferral option. It will allow you to temporarily defer your mortgage payments for 2 months adding them to the end of your mortgage. So you’ll get a break for now, but will still have to make the payments plus interest at the end of your mortgage. At this time banks have not determined the credit reporting impacts of loan deferrals. So be careful when utilizing this option as it could impact your credit score and ability to borrow funds in the future.
Another option is a loan forbearance which allows you to temporarily lower or pause your payments for a longer period of time. Just like the deferral program any paused payments will be added w/ interest to the end of your own and may also impact your credit score.
Mortgage deferment and mortgage forbearance allow borrowers to temporarily stop making their monthly payments, but they differ in what happens afterwards. At the end of a forbearance period, the amount of payments missed are due in a lump sum. However, lenders may choose to work with borrowers to structure a payment plan. It is important to note, in order to qualify for a forbearance or deferral, you will have to prove a decrease in income. Unfortunately the forbearance and deferral options are currently only available to Fannie and Freddie loans. These options do not currently apply to commercial or portfolio loans.
If you have hard money loans, pay your hard money lenders first if you can. You are going to want to be able to continue to do business with them in the future. Paying during tough times will be remembered. You want the reputation of someone who always pays. Pay vendors second. You also want to be able to work w/ them in the future and don’t want to be that guy. If you have to choose between hard money and vendors, try to pay your hard money lenders on time and vendors late since it is harder to find hard money lenders than vendors and as the economy gets tighter, hard money lenders might be even harder to come by.
If you maintain an emergency reserve fund and invest conservatively for the very long term then your risk of going bankrupt or having to sell is low, Be grateful, this is a privileged position
The economy can’t take away your work ethic. Use this time to improve your processes and learn your market. Difficult times like this bring us back to the fundamentals where we focus on cash flow, reserves, and conservative investments. Things are never as bad as they seem when you are in the middle of it. Don’t let your emotions get the better of you. Keep your cool when talking with your tenants.
Now if you’re listening/reading this and thinking I really need to get a handle on my investment strategy in general, we would love for you to check out our Invest Smart RVA YouTube series. We publish a new video each Thursday afternoon.
I would like to know, if you are a real estate investor in the Richmond area. If so, what tips do you have for working with tenants who can’t pay rent? Put those in the comments below.