Tenants and the Economy
As residential rental property owners, we are experiencing one of the most challenging economic conditions of our time. These are the times that test a landlord’s spirit, resolve, and commitment.
Almost daily, there is news of more job cuts − five-thousand jobs lost here, fifty-thousand jobs lost there. These headlines may seem distant until you receive a call from a tenant saying they are sorry, they lost their job, cannot pay rent, and will be breaking the lease and moving out at the end of the month. It is at that moment the headlines hit you right between the eyes.
We have to realize and accept that for the most part, we are not in a normal market. Supply is far exceeding demand, which has created a renters’ market that requires thought and creativity in order to survive. As a landlord, what options do we have available to us? How do we stay afloat and avoid prolonged vacancy?
Picture this: it’s the middle of the month and you get that “I’m sorry” call. The tenant tells you he lost his job, has had his hours cut back, lost a contract, or gives any number of reasons for why he will not be able to pay rent on time.
Your pulse begins to race, your blood pressure starts to raise, beads of sweat form on your forehead—you are becoming stressed. Like many residential rental property owners, you too are probably operating on a thin budget and have a mortgage or two to pay.
Your first thought is to begin the eviction process and get the “bums” out. Take a step back, catch your breath, create some distant between you and the situation so you can think clearly, objectively, and in a less reactionary manner. The typical eviction process may not be the best option in this situation.
Let’s look at the costs that will likely be incurred with the typical eviction process:
• Legal expenses – attorney’s fees, court costs, or both
• Lost rents
• Clean-up and fix-up (transitional) expenses
The bottom line is that expenses will be incurred − some known, but most unknown. Is this really the best course of action?
You have to think outside the box and consider other possible solutions. You may even be able to keep the newly unemployed tenant, and save yourself a lot of money, trouble, and goodwill with your tenants?
Tenant Skill Sets
What line of work does the tenant come from? What skill sets do they possess? Consider trading rent for work.
The following is a list of professions that may be useful:
• Bookkeeper
• Handyman
• Landscaper
• Laborer
• Painter
You already know the value of a worker who possesses such skills. If they do happen to possess these skills, can you put them to work on one of your properties or in your business? Remember to be creative − you could even broker the tenant out to another property or business owner in need of such skills.
Lease Modification
Leases, like other contracts or agreements, are not necessarily set in stone, and you can modify or renegotiate the contract or agreement at anytime if all parties concerned are in agreement to do so.
For example, let’s say your tenant entered into a lease agreement several months ago. They are paying you $1,300 per month to live in the home and have been problem-free to this point. The tenant informs you they have lost their job and can no longer afford to pay the rent.
Perhaps an appropriate response would look like this:
• Be empathic - The last thing anyone wants to feel when their chips are down is that another person of authority is giving them more bad news and causing more humiliation and embarrassment.
• Establish intentions - What does the tenant intend to do from this point forward? Is he capable of making future rent payments or not? Will he be moving out by the end of the month? Does he intend to attempt to apply his security/damage deposit to the next month’s rent?
• Evaluate information – After gathering all the pertinent information from your tenant, you are in a better position to make a decision.
Let’s look at a few possible solution scenarios:
(For the consistency of these examples, I am using two months’ numbers for comparisons.)
• Prior to the tenant’s laying off:
Legal fees and court costs $ 0.00
Mortgages paid (2) $2,600.00
Transitional expenses and repairs $ 0.00
Total estimated expenses $2,600.00
Rental income received $2,600.00
Net negative cash flow $ 0.00
• Potential cost of eviction:
Legal fees and court costs $2,000.00
Mortgages paid while vacant (2) $2,600.00
Transitional expenses and repairs $1,000.00
Total estimated cost of eviction $5,600.00
Rental income received $ 0.00
Net negative cash flow ($5,600.00)
• Potential cost of voluntary move-out:
Legal fees and court costs $ 0.00
Mortgages paid while vacant (2) $2,600.00
Transitional expenses and repairs $1,000.00
Total estimated cost of move-out $3,600.00
Rental income received $ 0.00
Net negative cash flow ($3,600.00)
Because of the potential costs of eviction and voluntary move-out, you would rather not evict or have your tenant move out unless there is no other option.
What if your tenant wants to stay, but cannot afford the current monthly rent of $1,300? What if he can only afford to pay a monthly rent of $1,000 until he is gainfully re-employed? Let’s assume he will be unemployed for two months, after which the rent rate returns to the agreed upon amount of $1,300.
Here is how this scenario would look:
Legal fees and court costs $ 0.00
Mortgages paid (2) $2,600.00
Transitional expenses and repairs $ 0.00
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Total estimated expenses $2,600.00
Rental income received $2,000.00
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Net negative cash flow ($ 600.00)
As you can see, the modification option is clearly the preferred scenario if at all possible.
I have tried to show you a couple of creative options you may have available to you; try to think of others. As you see, once you take the emotions out of a potentially bad situation and put some numbers to it, the situation may not be as bad as you first thought.
The scenarios I presented illustrate the need to keep your emotions out of unpleasant situations, to think creatively, and to stay focused on what will be better for you financially, while (if possible) looking out for the people with whom you have been doing business. Oftentimes, the two coincide.