Renter households in the US have surged. Consequently, the economic shock waves set off by the coronavirus pandemic will reverberate not only for renters but also for those property owners. Whether you’re an accidental landlord who has earned income from your old primary residence, or are dependent on your portfolio of multi-family real estate to provide most of your retirement income, here’s a summary of the barriers and opportunities you need to consider.
Obstacle – The current economic downturn has had a number of similarities to the last recession. While the reasons for them are different, home buyers and real estate investors are significantly saw lenders once again tighten their requirements for home purchases. The FHA has recently significantly tightened its credit scoring criteria for eligibility for a loan. Additionally, unqualified (NQ) loans have recently also taken on a blow. This is a major concern for certain real estate investors who need short-term loans to buy and renovate if they don’t meet income standards.
Opportunity – While credit has tightened on several fronts, support can offer significant advantages for eligible property owners. Rates today are relatively low. If you meet the guidelines on mortgage lending, you might be able to refinance a property at lower rates. Furthermore, if you planned to expand or improve your real estate portfolio, you can borrow at historically low rates against the equity in your existing properties.
Single Family Housing
Obstacle – With unemployment rising as a result of this pandemic, anyone who owns rental property is likely worried about the ability of their tenants to pay. Due to the passage of the CARES Act, evictions are suspended for 120 days starting on March 27, 2020 for tenants residing in properties seeking federal subsidies such as section 8 vouchers or for renters whose landlords have government-guaranteed loans, including loans secured by Fannie Mae, Freddie Mac, the FHA or the USDA. If the rental unit is not covered by the CARES Act, a lot of individual states have issued similar eviction suspensions.
Opportunity – While the CARES Act provides a means of avoiding eviction for some tenants, homeowners with government-guaranteed loans may be able to apply for forbearance for up to 360 days if their income is reduced as a result of COVID. Start with the two largest entities: FannieMae and FreddieMac, to determine if your mortgage is backed by a government agency. If your loans are not backed by a government agency, talk to your loan servicer and ask what options in your situation would be available.
If the tenant struggles to pay but is otherwise a good tenant, try using the mortgage rebate to temporarily reduce or postpone rent for a predetermined period of time. Also, you should help make your tenant aware of the increase in stimulus support and temporary unemployment benefit. Not only will these resources help them pay you but they will also help them get back on their feet faster once the economic downturn subsides.
Obstacle – Like smaller properties, multi-unit apartment complexes will face problems with tenants who have lost their jobs or have had a steep cut in pay. Anything larger than 4 housing units can not be financed with a mortgage, so Freddie Mac or Fannie Mae do not apply the loan forbearance options.
Opportunity – That does not mean you have no options. If you have a larger rental property follow a lot of the same guidelines as before. Work with your tenants to help them access relief if they are good tenants, so that they can pay you at least partly and stay in your unit for a long time.
You also want to get straight away to your bank to see how they can work with you. Just as you don’t want a good tenant to fail, they don’t want your loan to go into foreclosure. Ask them if they can work with you by cutting any payments and moving them to your loan’s end, or make interest-only payments on your loan for the time being. That way, if your tenants are able to pay enough rent to cover this lower payment, taxes, insurance and other fixed costs, you should be in a much better place to navigate the COVID outbreak.
Commercial Real Estate
Obstacle – Similarly, many small businesses have been forced to shut down with state and local residence-at-home orders that limit their ability to generate income to pay their rent. Commercial property can not be financed with a mortgage, so the Freddie Mac or Fannie Mae loan-forbearance options do not apply.
Opportunity – If your property is leased to a small business, you may want to work with your tenant to make sure they apply for the Payroll Protection Program if they qualify. If your tenants qualify for the PPP, then a portion of those funds can be used to pay their rent, which is a huge relief for you. Similarly, if you are actually paying a lower wage but earning more of your profits from the rent that your company charges to you, the PPP will help your business not only cover your paycheck but also the rent you pay to yourself as long as it is fair for local market.
Staying Prepared for Future Uncertainties
You’ve noticed by now that if you’ve got cash and a good credit score, it gives you more flexibility in dealing with this crisis. Here are a few best practices to live by in this and the next crisis to keep your real estate portfolio in good standing:
- Keep small or no credit card and other high-interest debt
- Keep credit score at or above 740
- Maintain sufficient cash to cover yearly vacancies and maintenance of the target property
- Maintain sufficient income to pay loan mortgage if there is a sustained vacancy period
There is a decent chance that if you make good moves in this market, with a better real estate portfolio, you might be able to walk out of that.