I felt it important to let you know what you, as a Landlord, should prepare for and expect over the coming months amid ongoing concern about COVID-19. The rapidly evolving situation of the past few weeks could (emphasis on could) bring implications for months to come.
With unprecedented closures and cancellations of events, venues, meetings and schools, small businesses and everyday people will begin to feel the economic stress in the immediate days ahead. Not weeks or months—days.
When business stops, business owners look for ways to keep the doors open by cutting payroll costs, which often means reducing employee hours or even implementing layoffs leading to lower paychecks or increased unemployment. This economic fallout will work its way into the rental market. The rental housing market is typically resilient over the long term, because everyone still needs a place to live.
However, the major anomalies we are experiencing could trigger slow pays, delinquent rents, increased collections, and increased vacancy expenses.
While I believe most residents will perform as agreed in the coming months, there will also be those situations that may require working with residents on payment plans or making some hard decisions. We may not see some of these things happening immediately with the April rent roll, but there could be a ripple effect felt to some extent for the remainder of 2020.
Going forward, I would ask that you keep in mind the following and prepare for these possible scenarios:
• LIMITED INCREASES IN RENT RENEWALS. We will look at potential rent increases, but don’t expect large rent increases for the remainder of the year.
• POSSIBLY LOWER RENTS. For properties that have leases up for renewal, we may need to adjust the rents to attract or keep renters to keep vacancy costs low. (Remember that vacancy expense is an owner’s largest expense).
• INCREASED DAYS ON MARKET. Your property may be vacant between tenants for a longer than normal period of time as the market ‘shakes out’ to a clearing price point.
• INCREASED RISK FOR SLOW PAYS. Your property may experience slow pays. As always, we will keep you informed if we do not receive the rent on time.
• INCREASED DEFAULTS. In some situations, a tenant may default and, while we have deposits, it may be necessary to evict the tenant quickly. This process does take some time, money, and there may be some vacancy costs.
• COURTS CLOSED. If Eviction is necessary, it may not be immediate due to the Small Claims Court system being closed for weeks at a time, essentially not permitting the processing of evictions.
So….what can you as a Landlord do to prepare for these possible scenarios?
- Build up cash reserves. Arrange your personal finances to build up your cash reserves to offset the possibility of slow pays, no pays, evictions, and longer than historical vacancy periods. Similar market reactions occurred in 2008—those Landlords who prepared ahead of time rode out the large waves just fine.
- Be Patient. Understand the reality that Vendors and Contractors are going to also have some difficulty during this time as they adjust all their business practices for doing repairs and maintenance in occupied homes. Delays on repairs and maintenance could occur as their staffs are also negatively impacted. Fortunately, Polaris “dug our well before we were thirsty” years ago and as such has more than our fair share of experienced and stable vendors.
- Focus on the Long Term. Like other challenging times in life, there are valuable lessons to be learned in navigating these troubling waters. The most successful investors we work with continually keep their focus on the long-term financial goals while monitoring the short-term operating cash flows.
I am realistically optimistic that individuals, businesses and leaders will think of creative solutions to lessen the social and financial impact this situation will bring. But I’m also a firm believer in The Stockdale Paradox and the need to face hard facts. (https://bigthink.com/personal-growth/stockdale-paradox-confronting-reality-vital-success?rebelltitem=1#rebelltitem1).
(Here’s the story behind the famous portrait of George Washington on his knees: https://prayeratvalleyforge.com/. Perhaps it’s something worthy of being shared on Facebook, given these times that are trying men’s souls….)
As always, we will keep you informed about your property as we continue to monitor and assess the rapidly evolving situation.
Here’s to your continued pursuit of Financial Freedom,