Rental Risk with COVID-19?

[SeattleRocks]

Been thinking about this today. I see a lot of you have rentals and gain a lot of passive income that you depend on via your rentals.

With Covad-19, are any of you seeing your rental income be threatened or think that perhaps that will happen? I think overall this could be a massive hit to FIRE'D folks.

Massive job loss = loss of income = lack of ability to pay rent

If we do indeed go to high unemployment rapidly (ie,. 15%+) coupled with the fact that a high percentage of people in AMER have low ability to even scrape together $400 makes me believe that there is going to be a massive issue with renters and those depending on rental income.

How are you handling this or thinking through it and are any of you already seeing the ramifications of layoffs on your rental properties/income?

 

[CaliKid]

Probably depends on the level of rentals. If you have A class rentals nothing has changed most likely. If you have C/D class then your tenants are hurting. B class probably hit and miss. Obviously gross generalizations. We shall see come April 1....

 

[Toocold]

Unlike stocks and bonds, RE is very much local. One of my properties just turned and it was listed and rented in 3 days.

Here is how I plan to manage the above scenario: 1) all of my properties are paid off, so as long as I have 20% of my properties rented, they will be cash positive. 2) we can reduce rent. 3) the business has a cash buffer to cover 18 months if I have 100% vacancies. 4) I mainly own single family homes in a fantastic school system so I think they will be easier to unwind and sell if I need cash.

Finally, while our rental properties cover our core expenses, we are diversified with stocks, bonds, cash and deferred compensation.

 

[FIREd]

I am expecting to see some softness in my rental income (my main source of revenue) this year and perhaps next. But I have plenty of cash to weather this temporary situation. I own my properties free and clear so my cash flow is well in the green. My high-quality rentals are in "hot" real estate markets (large cities with diverse and dynamic economies) that will probably rebound faster than most.

The government here (France) has already announced that workers who are temporarily unemployed due to the crisis will receive 80% of their pre-crisis net earned income, so most should be able to keep paying their rent. Since we are all confined at home at the moment, there is nothing else to spend money on anyway.

 

[Another Reader]

I'm finishing up an update on one house this week. Should hit the market Wednesday or Thursday. It's a smaller house in a high demand area.

I'm starting at the low end of the competition. If we go through next weekend with no interest, I will drop the rent. I have no problem undercutting the competition as the house is free and clear, as are most of the rentals.

I expect vacancy and collection loss to rise substantially. Many of the tenants are long term. We will work with them to get through this.

If the downturn is protracted and prices drop to fire sale levels, I will be shopping for deals.

 

[Luck_Club]

Have been running through the tenants in my head over the past few days. I have 3 restaurant workers and 1 casino worker in my rentals.

From the 3 restaurant workers, 1 is on the younger side, and I believe has family support if needed. 1 is older and probably most likely to be hit hardest, with least amount of support. However, they have strong payment history of being on time. The other managed during a health crisis, so I'm hopeful with them as well.

On the casino worker, the household has 3 incomes. They are less than a year in the house, and I have a feeling they will not let this crisis go by without an attempt to squeeze me.

So about a 16% of monthly rents are at risk in my eyes. Time will tell how it truly works out, but my worst case scenario is that I could face 1-2 months lost rent in 1 unit, or between 2-4% of my annual cash flow.

Marketable securities had a 25-35% value cut, and 1 dividend suspension so far. Looking back on how fast it happened, there was no way to prevent it. It was like everything looks good, then Boom market wipes out 25-35% of the equities value in a day or two.

 

[Sunset]

My tenants are on Pension or SS with small side jobs, so it could get a little tighter for them, it has in the past.

There is always the option of telling them, pay 1/2 -> 3/4 of the rent, and owe the rest.
Much better than getting zero rent.

 

[gauss]

In Michigan, the Governor has issued an Executive Order basically banning evictions for the next couple of weeks (through Apr 17).

-gauss

 

[mickeyd]

With Covid-19 [mod edit] being so pervasive, I would stay away from any kind of rental.

 

[hopefullyoneday]

I have 1 rental and it is a short term rental, 2 day min 30 day max. I have a couple cancels this month but new bookings for next month.

 

[Starsky]

I'm leaving it to my property manager, she tells me not to panic, although I have been running the scenarios in my head. All my property is far away, so there's nothing to do (yet). I fully expect to take a little rent haircut this year. Fortunately my rents aren't exorbitant, so I'm hoping our problems won't be either.

Frankly, we're blessed to be in great shape to weather this storm. No mortgages on our N. Carolina rentals (7) and with the quarantine in CA, our expenses have dropped like a rock, probably at least 50% (lots of cancelled travel and golf). Our biggest expense is our own mortgage which is about 20% of our typical income. We haven't drawn from our IRAs in a couple of years, but might have to take a little this year. No biggie. My biggest IRA investment is a fixed annuity. Most of the rest is in cash.

Frankly, I'd consider buying more rental property on the dip if prices drop later this Spring. My after-tax ROI has been almost 5% and with a little appreciation it's up over 8.5% for the year. I'm becoming very happy with slow and steady...

 

[calmloki]

I am concerned - Oregon is very tenant friendly and while I've no intent to toss people out in this time, having a zero eviction state mandate may encourage some of our tenants to enjoy a multi month free stay. Thus far though we have had one person who was going to break her lease and move in with her Mom contact us and ask to stay - her Mom is at serious risk and our tenant wants to avoid endangering her. No one else has indicated any intent to not pay. We will probably have one unfortunate vacancy. A long term elderly tenant who has been fading mentally was found wandering and lost, so she will probably go to a care facility. I'm afraid that could be a death sentence for her as crowded together patient care homes seem to figure large in Covid-19 mortality groups. Sux. I liked her and have kept her rent substantially below market.

We are free and clear on the rentals and I've been trying to move away from them. Had a commercial real estate company do a sales appraisal which they pitched at us online last week.They have our rentals valued way high, and are going to pitch us doing a 1031 into a no state tax state in either something larger or into retail NNN property. Somehow I feel like retail shop/restaurant building/commercial non-residential rental property is just the wrong thing to buy/exchange into right now! Might have to just keep collecting rent on the places we have.

 

[ut2sua]

Been thinking about this today. I see a lot of you have rentals and gain a lot of passive income that you depend on via your rentals.

With Covad-19, are any of you seeing your rental income be threatened or think that perhaps that will happen? I think overall this could be a massive hit to FIRE'D folks.

Massive job loss = loss of income = lack of ability to pay rent

If we do indeed go to high unemployment rapidly (ie,. 15%+) coupled with the fact that a high percentage of people in AMER have low ability to even scrape together $400 makes me believe that there is going to be a massive issue with renters and those depending on rental income.

How are you handling this or thinking through it and are any of you already seeing the ramifications of layoffs on your rental properties/income?

Rentals still look much better than stock holding in my portfolio. Valuation/rent payment may go down if bad things persist, but having real properties is a better feeling for me than holding many other things if we enter a prolonged recession/depression.

 

[ut2sua]

Somehow I feel like retail shop/restaurant building/commercial non-residential rental property is just the wrong thing to buy/exchange into right now! Might have to just keep collecting rent on the places we have.

I feel the same. It is probably not a good time to move into commercial right now

 

[NgineER]

We have been thinking through our tenants occupations. None in the restaurant industry, but some self employed. We just filled two vacancies and are showing another property now. These are all mortgaged, so that is a concern of tenants income gets tight. We are also in the middle of a major renovation of a new acquisition, and we are running low on cash. We are in the process of financing it, and are a little concerned about our ability to secure financing all of a sudden.
The five properties we have gross $12k/month, but we have debt service of $4,500 and then there is the expenses on top of it. It should increase to $14.5k gross and $6k debt service when the last property is renovated and financed. We usually net $25after all expenses for the four properties and this should increase with the 5th property coming online.

I’ve been wanting to leverage as much as possible in the accumulation of properties phase (before retirement), but we would sleep better now if they were paid off.

Just hoping that we’ll survive this downturn.

 

[Another Reader]

In your shoes, I might consider selling the new acquisition once the renovation is complete. Net proceeds might be better used to pay off a mortgage and put some cash in reserves. A couple of extended vacancies or collection issues might be a problem if $2,500 is all you are netting. Sell and live to fight another day!

 

[NgineER]

In your shoes, I might consider selling the new acquisition once the renovation is complete. Net proceeds might be better used to pay off a mortgage and put some cash in reserves. A couple of extended vacancies or collection issues might be a problem if $2,500 is all you are netting. Sell and live to fight another day!

Meant $2k/month currently factoring in 40% of gross will cover expenses including capex and 1/12 vacancy (have not ever seen expenses that high yet or a single day vacancy over the last four years) This will rise to $3k/month with the new property online. I know that vacancies will be more common going forward if this holds up.

 

[Montecfo]

Rentals still look much better than stock holding in my portfolio. Valuation/rent payment may go down if bad things persist, but having real properties is a better feeling for me than holding many other things if we enter a prolonged recession/depression.

Depends on leverage.

 

[SheitlQueen]

Oregon just banned evictions for tenants unable to pay due to financial hardship caused by Corona. At the same time I need to pay the mortgage on the rental as well as my own bills. So yes, I am concerned if the tenants quit paying because there is nothing I will be able to do about it.

 

[Winemaker]

If layoffs occur due to pandemic, won't they receive a unemployment stipend? Won't discretionary expenses be down since they can't blow it at the bar or mall? If one is confined to their home/ apartment/shelter, wouldn't they think that was their first/major expense they would pay?

If there is a rent holiday, there would certainly be a mortgage holiday as well. That's why we keep hearing of bank liquidity. I'm glad I refinanced last year to improve liquidity/cashflow $900/month.

 

[Fermion]

I don't see how you can require someone to keep making mortgage payments while simultaneously banning evictions. What if the bank forecloses on a rental which has tenants? Is the bank banned from foreclosures?

 

[Another Reader]

I'm getting ready to pay about $13k of property taxes in Arizona. I paid about $7k in February. No property tax holiday in Arizona or California. Fortunately the California taxes were paid for the full year in December and the lenders have escrowed for the remaining mortgaged rentals.

If the tenants get unemployment, in many if not most cases, it won't be enough to pay the rent. They will take advantage of rent forbearance to pay the car payment and the minimums on the credit cards, along with buying food and paying utility bills.

 

[Another Reader]

I don't see how you can require someone to keep making mortgage payments while simultaneously banning evictions. What if the bank forecloses on a rental which has tenants? Is the bank banned from foreclosures?

In 2009-2012 they had difficulty getting tenants out. The bank got the property, but the tenants largely remained. After the huge decline in values and no hope of recovering losses, banks became landlords.

 

[Fermion]

I'm getting ready to pay about $13k of property taxes in Arizona. I paid about $7k in February. No property tax holiday in Arizona or California. Fortunately the California taxes were paid for the full year in December and the lenders have escrowed for the remaining mortgaged rentals.

If the tenants get unemployment, in many if not most cases, it won't be enough to pay the rent. They will take advantage of rent forbearance to pay the car payment and the minimums on the credit cards, along with buying food and paying utility bills.

I don't see how any tenant is going to ever catch up if they skip out on more than one month of paying rent. There really do not seem to be any groups out there supporting landlord rights. Kind of glad I have never been a landlord.

 

[Another Reader]

I don't see how any tenant is going to ever catch up if they skip out on more than one month of paying rent. There really do not seem to be any groups out there supporting landlord rights. Kind of glad I have never been a landlord.

It depends on the state and to some extent the city. Evictions for non-payment already banned in San Jose. Will be statewide at some point, if it isn't already.