Retirees who rely on rental income are hard hit by federal, state and local eviction moratoria.
Here’s how the rules work and what you can do about them.
BY ROBYN A. FRIEDMAN (in the Wall Street Journal)
Real estate has been touted by financial advisers as a stable investment for those seeking a passive source of income in retirement. But instead of boosting their income, some retirees who invested in residential rental properties are now losing money due to eviction moratoria resulting from the coronavirus pandemic. Faced with tenants who can’t pay rent, these mom-and-pop landlords are finding their hands tied under the governmental orders, making them especially vulnerable and, in some cases, at risk of losing the properties securing their retirement.
Here’s what you need to know about the moratoria and what you can, and can’t, do when your tenants don’t pay.
What do the eviction moratoria allow?
In January, the Centers for Disease Control and Prevention extended the existing eviction moratorium to March 31, 2021. This moratorium prevents landlords from evicting tenants for nonpayment, although tenants can still be evicted for reasons other than not paying rent. To be protected from eviction, tenants must provide a written declaration to their landlord, attesting that they have sought government rental assistance, will earn no more than $99,000 in annual income (or $198,000 if filing a joint tax return), cannot pay their full rent due to loss of income, work hours or extraordinary medical expenses, have used best efforts to make timely partial payments, and would become homeless if evicted. All rental properties are covered, but the CDC moratorium doesn’t apply in any state or local areas that have their own moratorium with the same or greater protection. In those areas, state or local law prevails.
Gregory Scott Brown, senior vice president, government affairs, of the National Apartment Association, says that if rent remains unpaid when the moratorium expires, landlords will still need to go through the eviction process to regain possession of their unit.
Some eviction laws allow tenants to avoid eviction by paying off the rent debt and some judges in eviction proceedings decide if tenants are liable for back rent. They could rule that tenants don’t have to repay before eviction. Mr. Brown suggests that whenever possible, landlords try to work out a repayment plan with tenants to keep them in place.
What happens if I lock my tenants out for nonpayment during the moratoria?
Don’t. Don’t shut off utilities either. “The only recourse to regain possession of a unit is through the courts and the eviction process,” says Bob Pinnegar, president and chief executive officer of the National Apartment Association.
Take the law into your own hands, and you might be subject to civil or criminal penalties, depending on the jurisdiction. In New York, a court may even allow the tenant back into the apartment, says Howard Poch, a New York City attorney who represents landlords and tenants.
What can I do if my tenants stop paying?
While the various moratoria block evictions, they do not relieve tenants of their obligation to pay rent or from any other terms of their leases. In fact, the declaration tenants must sign under CDC guidelines specifically states that rent is still due and that failure to pay back rent once the moratorium lifts renders the tenant subject to eviction. In addition, evictions for reasons, like engaging in criminal activity or damaging your property, are still allowed. Documenting these violations of the lease is crucial, however.
Can I stop paying my mortgage on my rental portfolio property?
While it may be tempting to skip a mortgage payment, you risk default and foreclosure by doing so. Instead, contact your lender at the first sign a tenant may not pay, explain the situation and request forbearance, a temporary pause in payments, or a loan modification, which changes the terms of your mortgage and can result in a lower interest rate or extended term.
There are various programs in place to help property owners avoid foreclosure, particularly for properties with federally backed mortgages. Check with your lender. Don’t worry about a hit to your credit. According to Greg McBride, chief financial analyst at Bankrate. com, for federally backed mortgages and pandemic- caused hardships, loans in forbearance will still be reported to credit bureaus as being current.
Are there any carve-outs or exceptions in the law for landlords who are retirees who rely on rental income?
No.
What should I do if my tenants lose their income or I think they might?
The best way to deal with this issue is to avoid it.
Screen prospective tenants carefully, and treat them well. “One advantage small landlords have is that they’re not dealing with hundreds of tenants, so
they can have a personal relationship,” says Daren Blomquist, vice president of market economics at Auction. com, an online investment- property marketplace. “When you have that personal relationship, many times a tenant won’t just stop paying. They will let you know if they’re in a tough situation.”
Scott Stuber, a semiretired investor in Denver who owns 15 single-family rentals, knows all of his tenants. He handles maintenance issues within 24 hours, charges his tenants under-market rent and sends them gift cards at Christmas. “Our tenants recognize that they’re getting a great value,” he says.
Although one of his tenants lost his job and another is working reduced hours due to the pandemic, all of his tenants are now current on their rent.
If you have tenants who lose their income, or if you think they might, talk to them. Help them locate one of the many local, state and federal housing assistance programs available to cover housing cost. If President Biden’s American Rescue Plan is enacted, an additional $25 billion in rental assistance will be made available in addition to the $25 billion previously allocated by Congress.
Let your tenants know you’re open to a payment plan. David Dweck, an investor in Boca Raton, Fla., who owns a portfolio of single-family rentals he intends to rely on for income during retirement, notified his tenants soon after the pandemic began that he would defer their rent for 60 days if they needed assistance.
Two tenants took advantage of his offer; they both paid in full within 60 days.
If my tenants have lost their wages for reasons other than the pandemic, are they still protected from eviction?
The CDC order covers tenants who can’t pay their full rent due to a substantial loss of household income, loss of compensable hours of work, a layoff or extraordinary medical expenses. While the intent of the CDC moratorium was to prevent the spread of Covid, there is no requirement in the order that the income loss be due to Covid. State laws may differ.
As a retiree, how should I structure and operate my rental business and portfolio to weather unexpected events like the pandemic and the moratoria?
All retirees should have a diversified portfolio, with assets that could offset any decline in rental income.
“Rental income can be a great and, often, steady income source but it is by no means a guaranteed-income source,” says Jamie Hopkins, director of retirement research at the Carson Group, a national wealth management and coaching firm. Consult with a financial adviser to create a comprehensive retirement plan.
In addition, capitalization is key. Have sufficient reserves on hand to cover unexpected property expenses. The rental industry operates with low margins.
According to the National Apartment Association, only 10 cents of every dollar is returned to owners, with the balance going to mortgage payments, operating expenses, capital expenditures and taxes. That makes reserves all the more important. Experts suggest having three to six months’ worth of property expenses in reserve at all times.
Is it possible to refinance the mortgage on my rental properties to lower my expenses if my tenants aren’t paying rent?
While it is more difficult to refinance an investment property if the tenant hasn’t paid, it isn’t impossible. “Qualifying for the refinancing is still possible based on the owner’s total income and debt ratios, so a tenant that is not currently paying might not derail the refinancing, especially if they demonstrated that they’d made timely payments prior to the pandemic,”says Mr. McBride of Bankrate.
Take the law into your own hands and you might be subject to civil or criminal penalties.
Retirees who rely on rental income are hard hit by federal, state and local eviction moratoria.
Here’s how the rules work and what you can do about them.
BY ROBYN A. FRIEDMAN (in the Wall Street Journal)
Real estate has been touted by financial advisers as a stable investment for those seeking a passive source of income in retirement. But instead of boosting their income, some retirees who invested in residential rental properties are now losing money due to eviction moratoria resulting from the coronavirus pandemic. Faced with tenants who can’t pay rent, these mom-and-pop landlords are finding their hands tied under the governmental orders, making them especially vulnerable and, in some cases, at risk of losing the properties securing their retirement.
Here’s what you need to know about the moratoria and what you can, and can’t, do when your tenants don’t pay.
What do the eviction moratoria allow?
In January, the Centers for Disease Control and Prevention extended the existing eviction moratorium to March 31, 2021. This moratorium prevents landlords from evicting tenants for nonpayment, although tenants can still be evicted for reasons other than not paying rent. To be protected from eviction, tenants must provide a written declaration to their landlord, attesting that they have sought government rental assistance, will earn no more than $99,000 in annual income (or $198,000 if filing a joint tax return), cannot pay their full rent due to loss of income, work hours or extraordinary medical expenses, have used best efforts to make timely partial payments, and would become homeless if evicted. All rental properties are covered, but the CDC moratorium doesn’t apply in any state or local areas that have their own moratorium with the same or greater protection. In those areas, state or local law prevails.
Gregory Scott Brown, senior vice president, government affairs, of the National Apartment Association, says that if rent remains unpaid when the moratorium expires, landlords will still need to go through the eviction process to regain possession of their unit.
Some eviction laws allow tenants to avoid eviction by paying off the rent debt and some judges in eviction proceedings decide if tenants are liable for back rent. They could rule that tenants don’t have to repay before eviction. Mr. Brown suggests that whenever possible, landlords try to work out a repayment plan with tenants to keep them in place.
What happens if I lock my tenants out for nonpayment during the moratoria?
Don’t. Don’t shut off utilities either. “The only recourse to regain possession of a unit is through the courts and the eviction process,” says Bob Pinnegar, president and chief executive officer of the National Apartment Association.
Take the law into your own hands, and you might be subject to civil or criminal penalties, depending on the jurisdiction. In New York, a court may even allow the tenant back into the apartment, says Howard Poch, a New York City attorney who represents landlords and tenants.
What can I do if my tenants stop paying?
While the various moratoria block evictions, they do not relieve tenants of their obligation to pay rent or from any other terms of their leases. In fact, the declaration tenants must sign under CDC guidelines specifically states that rent is still due and that failure to pay back rent once the moratorium lifts renders the tenant subject to eviction. In addition, evictions for reasons, like engaging in criminal activity or damaging your property, are still allowed. Documenting these violations of the lease is crucial, however.
Can I stop paying my mortgage on my rental portfolio property?
While it may be tempting to skip a mortgage payment, you risk default and foreclosure by doing so. Instead, contact your lender at the first sign a tenant may not pay, explain the situation and request forbearance, a temporary pause in payments, or a loan modification, which changes the terms of your mortgage and can result in a lower interest rate or extended term.
There are various programs in place to help property owners avoid foreclosure, particularly for properties with federally backed mortgages. Check with your lender. Don’t worry about a hit to your credit. According to Greg McBride, chief financial analyst at Bankrate. com, for federally backed mortgages and pandemic- caused hardships, loans in forbearance will still be reported to credit bureaus as being current.
Are there any carve-outs or exceptions in the law for landlords who are retirees who rely on rental income?
No.
What should I do if my tenants lose their income or I think they might?
The best way to deal with this issue is to avoid it.
Screen prospective tenants carefully, and treat them well. “One advantage small landlords have is that they’re not dealing with hundreds of tenants, so
they can have a personal relationship,” says Daren Blomquist, vice president of market economics at Auction. com, an online investment- property marketplace. “When you have that personal relationship, many times a tenant won’t just stop paying. They will let you know if they’re in a tough situation.”
Scott Stuber, a semiretired investor in Denver who owns 15 single-family rentals, knows all of his tenants. He handles maintenance issues within 24 hours, charges his tenants under-market rent and sends them gift cards at Christmas. “Our tenants recognize that they’re getting a great value,” he says.
Although one of his tenants lost his job and another is working reduced hours due to the pandemic, all of his tenants are now current on their rent.
If you have tenants who lose their income, or if you think they might, talk to them. Help them locate one of the many local, state and federal housing assistance programs available to cover housing cost. If President Biden’s American Rescue Plan is enacted, an additional $25 billion in rental assistance will be made available in addition to the $25 billion previously allocated by Congress.
Let your tenants know you’re open to a payment plan. David Dweck, an investor in Boca Raton, Fla., who owns a portfolio of single-family rentals he intends to rely on for income during retirement, notified his tenants soon after the pandemic began that he would defer their rent for 60 days if they needed assistance.
Two tenants took advantage of his offer; they both paid in full within 60 days.
If my tenants have lost their wages for reasons other than the pandemic, are they still protected from eviction?
The CDC order covers tenants who can’t pay their full rent due to a substantial loss of household income, loss of compensable hours of work, a layoff or extraordinary medical expenses. While the intent of the CDC moratorium was to prevent the spread of Covid, there is no requirement in the order that the income loss be due to Covid. State laws may differ.
As a retiree, how should I structure and operate my rental business and portfolio to weather unexpected events like the pandemic and the moratoria?
All retirees should have a diversified portfolio, with assets that could offset any decline in rental income.
“Rental income can be a great and, often, steady income source but it is by no means a guaranteed-income source,” says Jamie Hopkins, director of retirement research at the Carson Group, a national wealth management and coaching firm. Consult with a financial adviser to create a comprehensive retirement plan.
In addition, capitalization is key. Have sufficient reserves on hand to cover unexpected property expenses. The rental industry operates with low margins.
According to the National Apartment Association, only 10 cents of every dollar is returned to owners, with the balance going to mortgage payments, operating expenses, capital expenditures and taxes. That makes reserves all the more important. Experts suggest having three to six months’ worth of property expenses in reserve at all times.
Is it possible to refinance the mortgage on my rental properties to lower my expenses if my tenants aren’t paying rent?
While it is more difficult to refinance an investment property if the tenant hasn’t paid, it isn’t impossible. “Qualifying for the refinancing is still possible based on the owner’s total income and debt ratios, so a tenant that is not currently paying might not derail the refinancing, especially if they demonstrated that they’d made timely payments prior to the pandemic,” says Mr. McBride of Bankrate.
Take the law into your own hands and you might be subject to civil or criminal penalties.