In the past week, I’ve heard from landlords and those who are thinking about becoming landlords regarding rentals in the time of coronavirus.
There are some real estate investors who have tenants who are able to continue to pay, which means the landlord is also able to cover the mortgage payments, property tax, insurance and necessary repairs.
I’ve also heard from some who have tenants who are still refusing to pay, even though they have jobs and have no legal right to refuse rental payments. In some areas, judges are not strictly following the law and that means no evictions. Period.
And I’ve also heard from owners who have let their properties sit vacant for months rather than run the risk of a tenant who trashes their property and they can’t get out due to eviction stays.
It all comes down to one big question.
What’s happening to landlords during eviction stays?
Ever so often, you’ll see an article written about landlords who are facing mounting debt and foreclosure due to the fact that their expenses continue while tenants don’t pay. Even worse, eviction stays that are enforced by courts without following the law allow tenants to damage property. Landlords have been forced to pay for utilities on behalf of their tenants, in addition to covering property tax, repairs, insurance and mortgage payments.
For the Mom-and-Pop landlord, this can mean financial ruin. In the best of times, they may receive rental income that barely covers the expenses and now with tenants that don’t pay, it’s become a nightmare.
That’s the crux of the problem. There is a lot of help for renters in the law, but there isn’t always help for landlords.
What solutions are available for landlords?
That’s all the bad news. Now let’s talk about some solutions that can at least hopefully ease some of the pain.
The latest Coronavirus bill set up the Coronavirus Relief Fund (CRF) which will be administered by the Treasury Dept and will provide $25 billion in rental assistance. Funds will be disbursed to states and tenants will apply for aid through state or local relief agencies.
The funds can be used for past-due rent and overdue utility payments from the start of the pandemic, as well as future bills. And payments can be made directly to landlords instead of filtered through tenants.
However, to be eligible for the funds, someone living in the rental must show they have qualified for unemployment benefits, have lost part of their income or have experienced financial hardship because of COVID-19, or can show that they are at risk of losing their home.
Landlords can be paid directly by state and local governments as long as tenants have signed off on the application.
The law appears to be silent on what happens if the tenant refuses to cooperate in getting the landlord paid.
If you currently have a tenant who hasn’t been paying you, this may be a way to get some payment. The downside is that you may need to settle on the amount of past due rent. Right now, you, as a landlord, have a right to sue for past due payments.
Tax strategies for real estate losses
If you end up having a nonpaying tenant, you will undoubtedly have real estate losses.
If you had losses in your business, you’d likely be able to deduct them against your other income. But real estate losses are different. It’s like insult to injury. You have to pay money out of your pocket and you lose the tax deduction.
The issue has to do with passive real estate losses. If your adjusted gross income (AGI) is less than $100,000, you can take a write off of up to $25,000 of the losses against your other income. If your AGI is over $150,000, you can’t take any write off at all. Between $100,000 and the $150,000, the amount you can deduct phases out.
The exception is if you are a real estate professional. If you qualify, you can take an unlimited amount of real estate losses against your other income.
If you are now working less hours as well at your job or business, it’s possible that you may be able to qualify as a real estate professional.
You can find out more about real estate qualifications here:
Rentals that are safer for landlords
Vacation rental or short-term rentals are exempt from the eviction stay. That means if you AirBnB, VRBO or otherwise use a vacation rental type of strategy for your rentals, you won’t have to worry about non-paying tenants
Eviction stays are only enforced for long term rentals.
AirBnB rentals (and the like) are having mixed success depending on the market. One client turned her AirBnB into short term, furnished housing for medical staff who couldn’t safely go home after exposure to COVID. Her properties were rented with waiting lists.
Other clients have AirBnBs in areas that still have tourism. In fact, the business is doing better because AirBnBs are generally considered safer than hotels during pandemics.
Another strategy is having the “rent to own” tenant/buyer. The exact details of how RTO works will depend on the state in which the property is located. Details vary by state. But most states have some kind of version for this.
In general, it works for the landlord/seller because he or she is getting a tenant who is incentivized to keep making payments. The tenant buyer has put down a sizable lease option payment which can be used against the purchase price, along with a certain amount of each rental payment, provided the payments are made in a timely fashion.
The payments continue for a specified time, often 2-5 years, and then the tenant/buy can exercise the option and buy the property.
During the time that the tenant/buyer is renting the property, the landlord/seller can still depreciate the property and the tenant/buyer is usually responsible for maintenance.
This works for the tenant/buyer because it allows time for the tenant/buyer to get their finances straightened out. Maybe their credit is bad right now and it needs to be cleared up. Maybe time is needed to get a bankruptcy off the record. If the market is appreciating, it’s also a great way for the tenant/buyer to lock in a price.
Right now, it’s a great strategy for the landlord/seller because the tenant/buyer is motivated to make payments and keep the property up. If for some reason, there is a lapse there was a sizable deposit so the landlord/seller isn’t out of pocket as much.
What’s next for real estate investors?
We’re in a fairly volatile time for real estate investment. People who work from home for the foreseeable future are moving to more affordable rentals with space around them. Other landlords who rent to people who have lost their jobs are struggling with no rental payments and no way to pay their own bills.
Hopefully we see more relief that is geared toward helping tenants, but not doing it on the backs of the Mom-and-Pop landlord.