Three Steps Landlords Can Take When Rents Fall Short

Logan is the Co-Founder of Landlord Studio, the only complete property management and accounting solution for real estate investors.

Real estate has always been one of the most secure and trustworthy long-term investments. It’s proven time and again to be a helpful vehicle for building wealth. However, we’re facing unusual times: a global pandemic with record numbers of unemployed, increasingly polarized political views and growing wealth disparities. This has caused a great deal of uncertainty in the real estate market, and it should come as no surprise that many landlords – and tenants – have expressed concerns around rent payments.

This is reflected in the numerous news stories published painting worst-case scenarios almost as inevitabilities. Despite this, I can’t help but think that the headlines predicting tsunamis of evictions are just that – headlines. They make for good stories, but the reality is thankfully somewhat less exciting.

My company recently published our Residential Rental Index for October 2020. This report aggregates data from over 10,000 active leases nationwide. These leases relate to a variety of rentals covering various rental class groups, including class A, B and C, as well as student accommodation. In the report are three key emerging trends. First, was a small month-on-month drop in overall rent collected after 28 days in the months of April and October by 3% and 2% respectively. Second, despite the relative stability in overall rent collected, there was a significant decrease in rent payments made on or before the rent due date. In fact, rent collected by the rent due date dropped 7% between May and October.

Third, for the months of April, May and October there was a noticeable increase in time taken for 70% of the landlords on our system to complete their rent collection. In April, it took seven days longer than the baseline average of 12 days for landlords on the system to collect rent. In October, it took three days longer than the baseline average.

While the impact of the pandemic on rent collection trends is clear, it’s not the worst-case scenario that many have expressed concerns about. There is surprising market stability which belies the more provocative – and in some cases downright apocalyptic – news headlines. It is taking many landlords longer than usual to collect rent, a trend which appears to be worsening. However, our data also shows that after 28 days, the majority of tenants have completed their payments. In other words, rent is still being collected; it’s just taking longer.

With no further stimulus action forthcoming from the federal government, this current negative trend of delayed rent collection could very well be further exacerbated by several factors. In one report, it was estimated that some 20 million Americans could be in danger of eviction by the end of the year. Additionally, the pandemic is entering a new wave, contributing to new economic hardship for many individuals. On top of this, we are entering the Christmas holiday period which, according to our data from 2019, can negatively impact rent collection trends.

There is a clear correlation between our data, stimulus aid and the dramatic rise in unemployment due to the pandemic, with over 7.9 million Americans still unemployed as of the end of September 2020 compared to 3.5 million in February. What these headlines and trends don’t take into account, though, is that nobody wants to go through an eviction process, it’s time-consuming, expensive and stressful for both parties. If a tenant finds themselves in financial hardship because of the pandemic, very few landlords are going to launch straight into evicting their tenants. 

So, what are landlords and property managers doing?

Landlords rely heavily on rent payments to pay their mortgages and cover the various overheads that come with owning property. Because of this, an accumulation of missed rent payments could result in landlords defaulting on their mortgages. There is, however, no one-size-fits-all solution to this. Unfortunately, because rental income is considered passive, many landlords don’t qualify for small business loans. As such, there are few financial relief options you can pursue directly. This makes finding an amicable solution with your tenants essential.  

The first step is to communicate with them. You can firmly express the importance that rent is still due while explaining your own situation. While there is a public health eviction moratorium until the end of December for tenants who can prove their financial difficulty as a result of Covid-19, it doesn’t mean an amicable rent solution is off the table.

The second step should be to encourage tenants to pursue potential avenues for assistance. Whether it’s borrowing money from family, exploring relief programs for other financial commitments or going directly to emergency rental assistance programs from federal and state governments, encourage tenants to explore all options.

If the lack of financial aid offered to landlords at this time and the potential avenues for tenants seeking relief yield little or no benefits, it’s at this point landlords should consider the third step. This is to implement a rent reduction or rent deferment plan. 

A number of landlords on our software have been moved by their unique situation to adopt contingency strategies, including temporary rent reductions, delayed or forgiven rent payments, and allowing tenants to break the lease early so they can move on to a more affordable property. If you do go this route and you have a federally backed mortgage with Freddie Mac or the Federal Housing Finance Agency, you may be eligible to get relief under a federal mortgage forbearance program.

No matter what solution you find – whether it’s fine-tuning rent collection processes, finding your own forms of financial relief or reaching a compromise with your tenant – it’s important for you to accurately track all rent payments, communications and arrears for both tax purposes as well as potential evictions. 

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