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During recessionary times, you may find yourself with a tenant who is “freaking out” wondering how they’ll be able to pay the full rent this month, and maybe next month’s rent as well. The fact is that during a recessionary period, investors at one time or another will need to deal with tenants who suffer a job loss or shortage of funds.
Uncertain times are tough, not just for tenants but landlords as well. It’s critical that everyone works together in order to come to a mutually agreeable outcome. Here are some of the key strategies for managing your rental properties during these difficult times with tenants.
Types of rent relief and discounts
During recessionary times it makes good business and ethical sense for landlords and tenants to find a win-win solution for rent relief and discounts. Even if a tenant can be evicted, there’s no guarantee you’ll be able to quickly find a new tenant who can pay the rent.
The more time a unit sits vacant, the higher the risk of vandalism and the longer your cash flow stays negative. As the saying goes, “Something is better than nothing,” especially during these uncertain times.
Types of rent relief and discounts vary based on your local and state landlord-tenant laws. Three of the most popular ways to provide your tenants with a short-term discounted rent include:
1. Rent reduction
By lowering the tenant’s rent by a fixed amount for the remaining terms of the current lease. If you choose this option, be sure to look at what other landlords in similar situations are doing, to ensure you’re offering a ‘market discount’ that’s fair and equitable.
2. Rent abatement
A plan developed with your tenant to forgive any past due rent provided the tenant agrees to stay current. Abatement may be a good option if your tenant has reliable employment in an industry less affected by the recession, such as working for the government or a job requiring high skill levels.
3. Rent deferral
Is a hybrid rent relief plan that combines aspects of reducing and abating the current rent. Under a deferral program, you agree to reduce the existing rent amount with the tenant agreeing to make up the difference in one lump sum or through increased rent at a later date. When you defer the rent, be sure to also extend the current lease so that your tenant has sufficient time to pay the rent difference due.
Types of rental payment plans
Be sure to think things through when a recession makes it necessary to discount rent and create payment plans for tenants. That’s because short-term plans can morph into permanent rent reductions that reduce long-term profits and property market values if you’re not careful.
For example, giving the tenant notice that a previously reduced rent amount will return to the original level gives you the flexibility to raise the rent back to fair market value when the economy improves.
Creating a rent payment plan
The first step in putting together a rent payment plan is to research your local regulations to make sure that what you’re doing is legal. Your state and city websites will have links to what a landlord can and can’t do when creating a payment plan, while the Department of Real Estate website for each state should have a link to the text of the local landlord-tenant laws.
If the law allows, ask your tenant for verification of how much income they’ve lost. Be ready to help people who are truly in need, but don’t fall into the trap of giving a tenant who is still making thousands of dollars a month a break on the rent.
Regardless of the rent payment plan you agree to with the tenant, be sure to put everything in writing:
Option #1: Partial payments
Reduce the rent by the same percentage of the tenant’s lost income. When the tenant’s job is back to normal, prorate the total reduced amount over a period of several months, then add the amount to be repaid to the regular monthly rent.
Option #2: On-time payment discounts
Used to encourage your tenants to pay their rent on or before the due date. For example, you could offer a:
- 10% discount if the rent payment is received before the 1st of the month
- 5% discount for tenants who pay by the 5th of the month
- Waive the late fees (without offering a discount) for tenants who pay by the 10th of each month
Option #3: By request payment plans
Avoid having tenants take advantage of rent payment plans who really don’t need the help. Begin by taking the approach that the full rent is due, then work with your tenants on a case-by-case basis, one month at a time. Maybe you have a tenant who has been renting for several years and needs an extra week to pay, or another who has a reduction in hours worked and is coming up short for the month.
When asked about rent discounts and payment plans, Patrick Carlisle, Chief Market Analyst at Compass notes that “This will have to be handled on a case by case basis. If payment plans or temporary discounts look like they will work out over the longer term, then they should certainly be considered.”
Carlisle continues that “Ultimately a tenant who can’t or especially won’t pay rent, the only solution may be eviction, when that is allowed by emergency laws. Of course, if a landlord is in a position to help tenants in desperate situations, at least in the shorter term, then that is something up to each investor to consider or not.”
Being proactive and communicative
You’ll gain the most benefit by being proactive and reaching out to tenants early-on during these uncertain times. Although neither of you may have expected a recession, it’s up to you to communicate with your tenants because their rent is what pays your bills:
- Plan ahead for a rent interruption by asking why a tenant is having trouble paying the rent, explain your financial situation to the tenant, and agree to a solution based on each tenant’s specific needs.
- Create a detailed agreement by asking your tenant to tell you what works for them, then use their dollar figure payment schedule to draw up a written addendum to your lease that is signed by both parties.
- Recessions are short-term, but memories are long-lasting, so remember to keep the big picture in mind and retain your tenant’s goodwill by doing your best to keep tenants and get them back on track when the economy begins to improve once again.
Evictions during recessions
Evicting a tenant when everything is ‘normal’ is usually never a pleasant task. However, evictions during recessions, lockdowns, and economic downturns are even trickier. That’s because many cities, counties, and states have enacted rules and moratoriums that override common law to offer tenants additional protections against evictions.
Most states have policies that cover every municipality within their borders. However, California has over 120 local jurisdictions where laws on evicting tenants can vary, while ordinances in Missouri are different for Jackson County, Kansas City, and St. Louis.
Two good sources for learning how landlord-tenant laws govern evictions during recessions are:
- American Apartment Owners Association (AAOA) for an interactive map of landlord tenant laws for the state your rental property is located in
- NOLO for a chart listing the primary landlord-tenant statutes for each state, including the District of Columbia
- Association of Real Estate License Law Officials (ARELLO) provides a list of real estate regulatory agencies in North America
Keep a cool head and don’t panic if a tenant says they need help paying the rent. The fact is that economic recessions historically come and go, but there is always a need for housing.
Although your cash flow may be low in the short term, recessions can actually help real estate investors. The rental market often improves during uncertain times as more people choose to rent rather than own during unstable economic periods.
Staying flexible by working with your tenants when and if they need help can lead to more profitable rental properties when the recession runs its course.