How Flexible Should You Be With Rent Payment Issues Due to COVID-19
Many tenants who are temporarily out of work are struggling to make rent payments due to COVID-19
Coronavirus has had a major impact on the global economy. As of April 20th, the U.S. has the highest number of cases in the world, and Michigan has been particularly affected. Not only are there a large number of cases in the state, but over 1.04 million Michigan residents have filed for unemployment since the beginning of the Coronavirus outbreak – which represents 21% of the state’s entire workforce.
Many tenants who are temporarily out of work are struggling to make rent payments, and this problem will worsen if the quarantine lasts for an extended period of time. This means that landlords who rely on regular rents for their livelihoods are now facing a difficult decision: whether to be strict with the payment terms stipulated in their lease contract, or try to find a temporary arrangement that works for both landlord and tenant.
This is not a straightforward issue. There are many factors to consider when coming to a decision over how to deal with your tenants’ late payments and still remain profitable in these unprecedented times, but there are some key points to be aware of when choosing how you handle the current situation:
From a legal point of view, it is very difficult right now to actually evict a tenant who cannot pay rent. The Michigan Supreme Court has issued an order – valid until April 30, although this could be extended – that limits courts’ activities to “essential functions” only. This means that eviction cases could take significantly more time to be resolved because even when the courts fully reopen, they will be saturated with all the cases that have been postponed during the lockdown. Furthermore, the CARES Act, which was signed into law on March 27, protects certain types of tenants from eviction during the coronavirus crisis.
Tenants’ individual cases
It is important to understand your tenants’ individual situations to be able to make the best decision on a case-by-case basis. If you’ve never had any problems with your tenant and they have always paid on time throughout their lease, it might be wise to be lenient, as long as you can afford to accept a reduced rent or delayed rent payments. In the long term, retaining good tenants can help minimize any losses you may incur in the short term.
However, there needs to be transparent communication and cooperation between you and your tenant when coming up with a payment plan. Cooperative tenants should not be offended by requests to document details of their layoff, cut hours, or unemployment filing status and amount, as this information can help both parties come to a workable financial arrangement.
Your personal situation
Make sure you run the numbers to figure out what kind of agreement you can afford to accept from your tenants so that you don’t put yourself in a difficult financial situation moving forwards.
In these times of crisis, in the same way, that your tenants may come to you for an adjustment of their rent, it is completely acceptable that you try to do the same with your own suppliers or lenders. It’s also a good opportunity for you to identify any superfluous expenses you may have that you can get rid of.
If you own several properties in a specific area, either as an individual or as a company, chances are that you are known in the industry and amongst potential clients. Therefore, you may have a company brand or personal brand, which has been built by your reputation as a landlord over the years.
Think about how the different scenarios that you are considering may affect your brand perception and what the potential outcomes of this could be in the long term. The coronavirus crisis may last for several more months, but your reputation will hopefully be around much longer.
Keep in mind the costs involved in carrying out an eviction process and factor these into your financial calculations when making your decision:
Eviction costs: If all goes smoothly, the eviction process entails almost no costs for the landlord, but there are some situations in which you may need to hire a lawyer to take a case to court. It can also cost several hundred dollars if an officer of the court has to physically remove the tenant, depending on your jurisdiction.
Vacancy: Because of the quarantine, you may not find a new tenant to start living in your property right away if you have to evict a current tenant. Expect a longer vacancy period than you usually experience between leases, and if your rental is located in a development, make sure that there are no restrictions currently forbidding new move-ins.
Lower rents: Rent prices are likely to dip in the short term, but are expected to recover by 2021. Therefore, if you decide to look for a new tenant now, you may have to settle on a reduced rental price, which would affect your income for the entire period of the contract. In the long term, this could impact your finances more than being flexible for a few months with your current tenant would.
These are difficult times for landlords. Never before has there been a situation when so many tenants face uncertainty over how to make rent payments, and it’s still unclear how long the situation will last. In the end, the best thing that you can do as a landlord is to have a good understanding of what your options are and what you can realistically afford to do so that you can develop a strategy that will protect your rental business for the future.
Image Courtesy of Anna Shvets