Ep. #53 - Can Your Tenants Pay Their Rent?

If you're a Landlord, you're likely in restless anticipation of April 1st - and like I suggested last week, will YOU be the "Fool" - when your Tenant's fail to pay their rent.

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Intro...

Welcome to Episode #53 - Can Your Tenants Pay Their Rent?

So this episode could almost be considered Part 3 of the prior two weeks, in that the underlying subject is again Corona-Virus. Last week I mentioned how I'm glad that approximately half my Tenants have Section 8 Vouchers, so I can be relatively certain of (if nothing else) - I'll at least be getting that money by week's end.

Yet last week, I closed on 3 more Townhouse units, 1 of which is vacant, and the other 2 are occupied by NON-Section 8 Tenants - so for this consideration, my balance is going in the wrong direction. And even more so, because one of my existing Section 8 Tenants has given notice that she's moving to get an additional bedroom. So I'm about to have TWO vacant units and now have 2 more Tenants who may or may not be able to pay their rent this week.

Now under normal circumstances, I'd have a vacant unit rented within a weekend of the former tenant moving out - as I conduct showings for the next Tenant, while the existing Tenant is still present. But in a COVID-19 world, no one wants someone coming into their house - and now that might actually be illegal with the current "stay-at-home" order for both the State of North Carolina, and the County of Durham where my properties are located.

So excluding vacant units and those with Section 8 Tenant's, I'm wondering the same thing that pretty much every landlord is right now - "Will my Tenants be able to pay their rent?"

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Because practically speaking, rent may not be their primary concern - especially with evictions on hold in many cities. FOOD is the primary concern of every person. So if someone has insufficient funds to pay all of their bills, they will (and SHOULD) buy FOOD first. And now we have kids at home from school, where they'd normally eat lunch there (maybe breakfast) - but now parents are having to provide breakfast, lunch and dinner. So food expense increases, while income drops (to ZERO for many).

In addition to food, many people have medical / medicine expenses that must take priority right up there with food. Hopefully rent squeezes in there next, but unfortunately many put not just utilities before rent, but also Internet, entertainment, transportation, and on... And I expect some will think, "hell, why pay rent when I can't be evicted?" - We may find ourselves at the end of a long line of expenses that comes even after Cable TV or Satellite, Netflix, alcohol, cigarettes, and on... Where does rent fit into the priority ranking of most Tenants?

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So on BiggerPockets.com, Brandon Turner has put out a couple of videos on this topic of Tenants not being able to pay rent - and some ideas of how to proactively communicate with them on the subject. I'll put links on the episode blog page to both of those videos - but I'm a bit conflicted on the idea of proactive Tenant communication on this subject.

For some reason, I believe that even bringing up the subject of rent NOT being paid - will make it more likely that rent WON'T be paid. I feel that if I proactively tell my Tenants how I'm going to handle instances where they can't pay rent - I'm also simultaneously telling them that its OK for them to NOT pay rent. Well it's not! So I don't even - I don't even want to go there... I don't even want to risk giving that impression.

So I'm not contacting my Tenants to tell them how we'll handle instances of rent NON-payment. I'm not saying anything about late fees being waived or evictions being on hold. Nope... Not mentioning ANY of it. But now that is not to say that I don't have a plan for this... I do. And it's not entirely different than what Brandon Turner speaks of in his videos.

Once a Tenant becomes late and the automated system hits them with a 5% Late Fee - instead of the normal 10-Day Pay or Vacate Notice, I'll instead then send them a notice specific to this Corona-Virus shutdown situation. That notice will express compassion for the situation and a realization that they did not cause this problem - we're all in thee same boat.

I'll put in some resource details as to how they might be able to seek aid from the various sources for help that are likely to be available to them - as some may be unaware. But most of all, my notice will seek to express that I'm not RICH. At least not how most Tenants seem to think of Landlords.

You've got to know that we live in a world where most people don't own even ONE house; yet most Landlords own at least two - and many own SEVERAL. So in the mind of most, if you've got more of something, its only because you took it from those who have less of that thing. In other words, they think that your owning multiple houses is the reason that someone else does NOT own a house. And that makes you evil. And obviously to own all those houses, you MUST be rich. And being rich is evil... They'll tell you it says so right in the bible (it doesn't by the way).

And since no one has sympathy for the rich, and you must be one of those evil rich people if you're a Landlord (owning multiple houses) - why should they pay you rent, you evil SOB. That's the mentality anyway. And that's reinforced by blocking evictions. The altruistic government is stepping in to prevent evil rich Landlords from evicting poor innocent Tenants. And so I have to try to get in their with a little logic and reason.

And so after expressing some compassion for the situation and resources that might be of aid - I'll next want to make it clearly understood that every single one of my properties has a mortgage that still must be paid - in addition to taxes, insurances, and in many cases, HOA fees. And even to that, Tenants are hearing about Mortgage forbearance to home owners - so I have to let them know that this relates mostly to owner occupants. And that my mortgages are almost all commercial - and they are not putting commercial mortgages into forbearance, as businesses are also considered evil and so why should they get a break!?

So the bottom line is that I'll have to pay the mortgage even if they don't pay the rent - and I get the money to pay the mortgage FROM their rent. That if they don't pay their rent, the money for paying the mortgage has to come out of my pocket. And certainly they don't think I am personally responsible for paying for their housing... Right!? And so hopefully, If I've done a decent job at tenant screening, then they should be reasonable people who can property assign those roles of who is responsible for their housing expense. My tenants should all know that I'm not responsible for their expenses in any way, shape or form - evil rich Landlord or not (which I'm not evil nor rich). Not yet anyway! Oh, and that relates to rich - I shall never be evil.

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Now, what if I had been in this Landlord game for longer than the 5 years I have been, and/or I had a different acquisition strategy - and my properties were all owned free and clear? That is my ultimate goal years from now. I want to own at least 100 Rental Properties, and I'll eventually want them to be paid off (not yet, but by then YES). And let's say I was there now, and so I had no mortgages. Would that make it any more OK for Tenants NOT to pay their rent?

What if the rent for those properties was my primary (or even sole) source of income? Would I not be entitled to every penny of that money? So while I want my Tenants to be fully aware that a Mortgage exists on their home and must be paid from their rent - I would be no less entitled to that money if there was no mortgage. And taxes, insurance and HOA still need to be paid. In most cases, a full 50% of rent goes to cover expenses and reserves (excluding the mortgage payment).

You must understand that many older Landlords have been in this business since the 70's or 80's (certainly the 90's) - and the rental income from these properties IS their retirement fund. It is there IRA or 401K. And this combined with Social Security (maybe a pension) it might be their sole means of support - or it may literally be all that they have - from a lifetime of taking risks and working hard.

Yet here they're not getting paid what they are clearly due, and can't evict a person to get someone in who can pay. And that's not even to say that they would do that - as I suspect many (like me) would be hard pressed to kick someone out when they find themselves unable to pay due to an unprecedented situation like this. It's just not their fault.

So for me, it goes into how the situation unfolds and what's the payment history of that Tenant. For instance, I have Tenants who have been with me for years and never had so much as a single late payment. I'll waive the late payment fee for them, as I know this situation has them somewhere they'd never have gone on their own.

But I've also got a few Tenants who are lake almost every month - and one who is literally late EVERY month. I'm not as likely to waive the late fee for them, because they were going to be late anyway - because they've always been late each of the last 6 months. I don't know... But they would have been late regardless - or irregardless - which is it?

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Anyway... Have your policy of EXACTLY how you're going to handle the Tenant who is unable to pay - in writing and ready to go BEFORE April 1st (you'd be a fool not to). Let them now you're sympathetic to their situation and willing to work with them to an extent. Provide resources that may be able to assist them with the money they need to pay the rent and other critical bills and expenses (like food) in full - including the suggestion of borrowing from relatives.

Ask... Have they filed for unemployment? Have they sought a personal loan. Do they have a credit card? I collect rent via Cozy.co and it allows payment by credit card (for a fee) - and I'd even be willing to work with them by covering that fee on their behalf. There are even both government and charitable resources that can aid with rent payments and other expenses. All such options should be fully explored BEFORE I should be asked to take a hit.

Because when the Tenant doesn't pay their rent, and the mortgage, taxes, insurance, and HOA must still be paid - they must be paid by ME, out my MY pocket. So the Tenant is essentially borrowing money from ME. And when I say ME, I mean WE, YOU the Landlord. Well, why should they be more willing to borrow money from ME, than from their cousin, aunt, uncle, mother, father? It's because I'm thought to be rich - how could I not be when I own all these houses!?

So make it clear that you're only able to provide that home for them if they are able to pay their rent to cover the expenses. That you can't cover those expenses for them, and that it's not your responsibility to do so - that's on their relatives. In fact, if they were my relative, I wouldn't have rented to them anyway for that exact reason - as they'd expect me to let them stay for free if they couldn't pay. Then I'd be arguing with my wife about why I evicted her cousin. Nope - No Thanks!

So once you've asked those questions and related these details - set expectations... Find out what amount they can pay. Maybe working with them in this situation is getting just enough to cover the expenses. That may be enough if you do not need the profit right now to live on. Maybe your rent is $900, but the expenses for the property only total $700 - and maybe they DO have that amount. Maybe not - but at least ask the question and let them know that you expect some amount to be paid.

Hey, like I said, this isn't there fault, but we all need to have some savings or access to critical funds, and its not your fault if they don't... Especially if they've got TV, Internet, Netflix, and on... I've ran into people with HBO, Showtime, Cinamax, Starz, Hulu and everything, going to concerts - but couldn't pay their rent on time. They have expensive shoes, cloths, jewelry, watches...

That's why I'm less likely to be willing to work with a Tenant with a history of being late. Because I don't go to concerts. I don't have Hulu. I've got Netflix and Prime. But I'm very strict on how I spend my money. I own a Barbershop, yet almost always cut my own hair at home. I've never owned a pair of expensive shoes. Don't spend much on cloths. Haven't owned a new car since I was 18, and even then it was a Geo Storm. My current vehicles are model year 2008 and 2013. Now my wife has a 2018. So how likely am I to be willing to work with someone with a nice new car, new cloths, hair / nails - and all that. All things I don't have - yet they can't pay me the rent on what I've chosen to spend my money on - that being assets. So now I should be punished because I sacrificed those things to get something that I felt was more important - and provided housing to people in the process - and that makes me an evil SOB!? No!

Yes, this is an unprecedented situation that no one could have planned for. Yet it is amazing how some basic financial practices could have allowed people to sail through this event without much of a worry - at least if it only lasts a month or two. Now sure if 3 to 6 months from now we're still dealing with this, then all bets are off - because even the reasonably prepared will be in trouble by then.

So... Be kind. Be compassionate. Be fair. Be Reasonable. But be firm. The rent HAS TO BE PAID. Nothing is being waived or forgiven. Even if you let things slide for a month or two, you can't do that indefinably and they'll just owe more later. So you're not doing anyone any favors by letting it slide. If the rent is $600 and they pay $60, it's still $60 less that they're in the hole for later. But if $600 is your rent amount, do everything you can to encourage the $600 to be paid in full. Or $500. Even $400 - but have them pay SOMETHING. Under NO circumstances do you want to establish that you are good with rent not being paid.

If aliens invade on the 1st, rent is still past due as of 6PM on the 5th.

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Outro...

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