There has been a surge of renter households in the US. As a result, the economic shock waves set off by the coronavirus pandemic will reverberate not only for tenants but the owners of those properties as well. Whether you are an accidental landlord that has enjoyed income from your old primary residence or are depending on your multi-family real estate portfolio to provide the majority of your income in retirement, here is a summary of the obstacles and opportunities you need to consider.
Obstacle – The current economic downturn has drawn several comparisons to the most recent recession. While the causes are significantly different, lenders have tightened their criteria again for home purchases for both home buyers and real estate investors. Recently, the FHA has significantly tightened their credit scoring criteria for qualifying for a loan. In addition non-qualified (NQ) lending has reportedly taken a hit as well. This is a significant concern for some real estate investors that need short-term lending to purchase and renovate if they do not meet income standards.
Opportunity – While credit has tightened on several fronts, financing may offer significant upside for property owners that qualify. Today’s rates are relatively low. If you meet mortgage lending guidelines, you may be able to refinance a property at lower rates. Additionally, if you were planning to expand or improve your real estate portfolio, you can borrow against the equity in your existing properties at historically low rates.
Single Family Housing
Obstacle – With unemployment increasing as a result of this pandemic, anyone owning rental property is likely concerned about their tenants’ ability to pay. Because of the passage of the CARES Act, evictions are frozen for 120 days starting March 27, 2020 for renters who live in properties that receive federal subsidies such as Section 8 vouchers or for renters whose landlords have government-guaranteed loans, including loans backed by Fannie Mae, Freddie Mac, the FHA, or the USDA. If the rental unit is not covered by the CARES Act, many individual states have issued similar suspensions on evictions.
Opportunity – While the CARES Act gives some tenants a means to avoid eviction, homeowners with government-guaranteed loans may be able to request forbearance for up to 360 days if their income is reduced as a result of COVID. In order to determine if your mortgage is backed by a government agency, start with the two largest entities: FannieMae and FreddieMac. If your loans are not backed by a government agency, speak with your loan servicer and ask about what options would be available in your situation.
If your tenant is struggling to pay but they are an otherwise good tenant, consider using the mortgage reprieve to temporarily reduce or suspend rent for a predetermined period. You should also help make your tenant aware of the stimulus support and temporary unemployment benefit increase. These resources will not only help them pay you but help get them get back on their feet faster once the economic downturn subsides.
Obstacle – Just like smaller properties, multi-unit apartment complexes are going to face problems with tenants who have lost their job or taken a steep pay cut. Anything larger than 4 housing units cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae don’t apply.
Opportunity – That doesn’t mean that you are without options. If you have a larger rental property, follow much of the same guidance as earlier. Work with your tenants if they are good tenants to help them access relief so that they can pay you at least in part and stay in your unit long-term.
You also want to reach out to your bank right away to see how they can work with you. Just like you don’t want to lose a good tenant, they don’t want your loan to go into foreclosure. Ask them if they can work with you by skipping some payments and adding them to the end of your loan or temporarily making interest-only payments on your loan. That way, if your tenants can pay enough rent to cover this lower payment, taxes, insurance, and other fixed costs, you should be in a much better spot to navigate the COVID outbreak.
Obstacle – Similarly, many small businesses have been forced to close by state and local stay-at-home orders, which limit their ability to bring in the revenue to pay their rent. Commercial property cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae do not apply.
Opportunity – If your property is leased out to a small business(es), then you may want to work with your tenant to make sure that they have applied for the Payroll Protection Program if they are eligible. If your tenants qualify for the PPP, then they can use a portion of those funds to pay their rent, which is a huge relief to you. Similarly, if you currently pay yourself a smaller salary but get more of your income from the rent your business pays to you, the PPP can help your business not only protect your paycheck but also the rent you pay to yourself as long as it is reasonable for the local market.
Staying Prepared For Future Uncertainty
By now, you have noticed that if you have cash and a good credit score, it gives you more flexibility in terms of dealing with this crisis. Here are a few best practices to live by to keep your real estate portfolio in good standing in this and the next crisis:
- Maintain little or no credit card and other high interest debt
- Maintain a credit score of 740 or higher
- Maintain enough cash to cover vacancies and maintenance on the target property for a year
- Maintain enough income to pay the rental property mortgage if there’s a sustained period of vacancy
There is a decent chance that if you make good moves in this market, you can possibly walk out of this with a better real estate portfolio.