We are in unusual times, for sure. We have not seen a situation like this in our lifetimes and can only look back to the Great Depression for possible scenarios. What does the impending crisis look like for landlords of both residential and commercial properties as it pertains to rent collection?
The first and most important consideration is that with the potential of no rent coming in, property investors/owners are facing mortgage payments, insurance and taxes that may not be supported by income realized. I have found that mortgage servicing agencies are, for the most part, giving a three-month grace period to mortgage holders who ask for this help. Most have not decided yet whether the payments will be added to the end of the term of the mortgage or amortized into the regular payment. But if you do have a mortgage that may be in jeopardy, I recommend that you contact your lender immediately. Of course, if you do not need the offset, you can pay the amount due, but it is better to be safe than sorry.
As an investor, I have both commercial and residential rentals. Residential tenants are facing different issues than commercial tenants, so they deserve separate discussions.
Some businesses are considered essential. They continue to operate; their employees are getting paychecks, and, in some cases, got raises to work in hazardous environments. Those types of businesses are in pretty good shape and will likely get through this with only a reduced profit margin due to higher employee costs. Companies that have retained earnings and cash on hand will weather this storm and be able to pay rent for their commercial spaces. Those that operate with little cash on hand will have bigger complications.
But the businesses that are totally affected are the ones that were required to shut down. The obvious ones are retailers and restaurants. But plumbers, electricians, contractors, beauticians, salespeople, industrial production assembly line workers, school ancillary personnel and so many others are being hugely affected. Those businesses have no income but still have all the expenses. There is help for businesses that are experiencing these profit losses, but the money is not available immediately. It is dependent on banks administering the loans and processing the applications.
As a result, landlords who cannot collect rent may face foreclosure if their mortgage payments have not been temporarily deferred. Many big-box tenants have announced that they are not making rent payments at any property they lease. I have also read the sad stories of people who have family businesses and have put their life savings into them. They are shut down and losing their businesses. Then they were told that the stimulus package they were counting on ran out of money. So those who did not get approved will have to try their luck with the government's second attempt.
There are so many small businesses that have had to lay off employees and still have no income to support their ongoing costs. If you have businesses like this in your portfolio, it would be helpful for them to hear from you about programs that may help them and options for their rent payments as soon as possible.
So what is happening to the residential rental market? Conversations with colleagues have revealed that during the past two weeks, many got at least 50% of the rents they expected. Some even got 100%, including me. But most are expecting the hammer to fall before long.
There are some local relief programs for which tenants can apply, but because we have run out of money for the businesses, it is uncertain whether this will be a viable alternative. More than 26 million people have applied for unemployment insurance. Many are struggling to receive the benefits they applied for.
Landlords and property managers are being forced to make arrangements for their tenants until this emergency has started to subside. We have learned that most families do not have enough money set aside to get through these difficult months or another emergency. They live paycheck to paycheck. And we know that it is likely that this unemployment number will increase as many cities and states continue to set back the date for opening the economy. Not all of these jobs will be there when the country opens back up.
I have heard many scenarios: Tenants are not renewing leases. Tenants are breaking leases. Tenants are asking for payment extensions. The bottom line is that people need a place to live. With no income and no savings to rely on, this may become a worst-case scenario for many.
So what can landlords and property managers do the help?
First and foremost, let your tenants know that you can work with them to a point. For those who cannot pay rent, they need to know that it is due on the lease but can be temporarily deferred. Be sure that they understand that if they can pay part, it will not incur a late fee, but the balance will be prorated until the end of the lease when they can start paying. If they cannot pay, they cannot pay. For those who have received stimulus checks, communicate that you expect them to do what they can to make a good faith rent payment of some amount. Some families will have problems paying for food and utilities. Encourage your tenants to talk with you about their immediate issues and help to make a plan for their rent payments. Get your agreements in writing, and give them a copy as an addendum to the lease.
These are unprecedentedly difficult times. Taking action to deflect the pitfalls for rent collection before they happen may save your own rental business in the end.