Landlords — Your instincts are wrong. They are screaming at you, “Save yourself and protect your income.” If Tenants can’t pay: “Evict Them.”
This reaction will be your downfall, and then society’s.
I have worked in real estate investment and property management long enough to know how most investors feel about tenants who fall behind on their rent. It’s usually something like;
“If only they hadn’t bought that big TV in their living room, they could have paid rent” — (a variation on the “poor choices” argument)
“If only they worked harder and got a second job, like I did, they could pay their rent” — (a variation on the “their just lazy” argument)
This rationale was usually false while the economy was doing well, and has now fallen into the demonstrably false realm since COVID-19 brought down the house of cards.
Now, real estate investors across the world are faced with a test of their will, and more importantly, a test of their logic. Most will fail.
Here’s the why:
Tenants are not lazy; hard work is the common denominator in the human experience, and you will do well to accept that. If you’ve done well, it’s almost never because you worked harder than everyone else; (although you did work hard…remember “denominator”), you mostly just got lucky. (Episode of Hidden Brain from NPR addressing much of this Here)
People know how to spend their resources; there is a deeply ingrained criticism that people of lesser means will misuse cash, which is a flawed and false trope, that just won’t die. This fallacy is reflected in the way nearly all charitable giving and means tested aid is allocated, from food stamps with restrictions on diapers, to Heifer International giving cows to people who could do much more with the $500. (Read the research from Give Directly for more)
With unemployment projections pointing to 15–25% ALREADY, where exactly do you think you will find your next tenant? Finding tenants is hard in good times and can be impossible when unemployment is high. (I began my property management career at the height of the great recession, and let me tell you, tenants were scarce for a while.) Not only may it be hard to back fill a unit, but the costs of lost income, marketing, turning the property (i.e. fixing for the next tenant), possible decreases in rent rates, possibility to placing a tenant even less stable, can add up fast.
Hypothetical Ex. Tenant is paying $1,000 per month and misses a payment, so you evict per the terms of the lease and applicable law(as is your right). The eviction process maybe costs you $800 (time and paperwork and legal filings). You turn the unit, which typically costs 10–15% of your annual rent so approx. $1,800 (paint cleaning, carpets and a few basic repairs). Then, it takes you 30 days to find new tenants(if you’re lucky), but because the market has dropped, you rent it at $950, for 30 days lost revenue of $1,000, and a 12 month term at reduced rate, $600 lost revenue. Now you’re $4,100 in the hole and that’s IF you can do all this in one month, and IF the tenant goes along with the process amicably.
(There is an argument that a recession as deep as this looks to be, where the rental market may actually benefit as underwater homeowners move into the rental market, but this mechanism is not well understood, and certainly not guaranteed.)
In most cases, tenant’s want to stay where they are, and landlords will benefit from their staying in place.
Work with your tenants to pay their rent across time, or for them to work it off in other ways like a work-trade, or even reduce their rent for a spell, so they can keep up with it until they find a new job.
People are natural problem solvers — Just be honest and communicate with your tenants. In my experience, this is almost always better than evicting a tenant. And now this is even more particularly vital if they’ve been laid off as a result of this pandemic.
These are good people, and you should keep them in your property.
Many single-property landlords out there may feel like they can’t afford this “charity”, but they couldn’t be more wrong. Booting out a freshly laid off tenant that want’s to stay is a bad call — get creative instead.
And for the tenants reading this, reverse it all and think from the perspective of a landlord; because, even though you may have just lost you job and are scared, doesn’t mean you are alone. Landlords (and even property management companies … usually …) are just people too — they are probably just as scared and may not be as “rich” as they look from your perspective. They may not have considered that you are willing to arrange something out-of-the-box to stay where you live. Make that known ASAP. And search for tenant advocacy groups that can help you pay rent or other support: The Tenant's Union, Housing and Urban Development, Unemployment Office, NGOs, and non-profits, friends and family, crowdfunding etc.
Talk to each other about ways to get through this, you will be pleasantly surprised at people’s capacity for flexibility if you give them an opportunity.
This is a time for our collective prefrontal cortex and executive wizard brain, to override our amygdala’s fight and flight lizard instincts. Slow down and think. This is a rational choice to keep tenants in place, it will save you money, effort and heartache, and we will all be better for it.
NOTES: *(I’m not even going to touch the moral argument for this, as it’s infinitely obvious, and we all know what the right thing to do is.) *(Many municipalities have already put eviction restrictions in place, tenants and landlords alike, should welcome this policy. This will smooth out this downturn to the benefit of all of us) *(Lastly, every situation is different, so this should not be construed as advice for all scenarios regardless of the facts. If you want my thoughts on your situation, drop me a line
for some free consultation)
*(Originally posted on Medium Here)