Keep Your Rent: A Real Estate Investor’s Perspective (Part 1)

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A few weeks ago where we talked about the growing movement Keep Your Rent movement that was spreading around the world. If you don’t know what I’m talking about, go back and read that article, but the gist of the movement is that because this damned pandemic is keeping millions of people from working, and governments have banned evictions, they should stop paying their rent.

April 1st came and passed as the world watched and waited to see if these angry renters would put their (lack of) money where their mouth was. And what happened? On April 11, CNN reported that nearly a third of people in the US did not pay their rent.

Now, I’m not a landlord, so this doesn’t exactly rock my world personally, but I wanted to get the perspective of someone who would get affected by this. So I reached out Scott Trench, the CEO of the site BiggerPockets.com, which is all about real estate investing, to see how this movement is affecting their members. Scott graciously agreed to answer our questions.

Scott, thanks for being here.

The Keep Your Rent Movement vowed to withhold rent from landlords on April 1. Since then, it’s estimated that nearly a third of rents in the US haven’t been paid. What do you make of this?

The claim that “nearly a third” of rents in the US haven’t been paid seems to derive from this WSJ article. I believe that headline is misleading and delivers a far more dramatic message than the reality of what has occurred this month.

First, let’s examine the data itself, data derived from a database of 13.4M apartment renters. There are over 45M units of rental housing stock in this country. Only about 12M units of that 45M are in apartment buildings with 10 or more units. It appears to me that this database is going to overrepresent apartment complexes, and underrepresent small multifamily properties like duplexes, triplexes, and quadplexes, and single family rentals.

The vast majority of renters in this country rent single family homes and residences in 2-10-unit complexes. Early discussions with investors who own this type of property indicates that they are receiving a much greater portion of their rent than what is suggested by the data provided in the WSJ article.

Second, I’d argue that the headline might sensationalize itself to someone unfamiliar with our industry. In a normal month, only about 81% of anticipated rents are collected in the first five calendar days. That dropped to 69% in April. This is a 15% decline, not a 1/3rd decline. One not familiar with these mechanics could frame a picture of rent collections that much more severe than the reality that has taken place.

Further, April is an unusual month just in terms of how the calendar dates fall. April 1st was a Wednesday. April 5th was a Sunday. For context, March 5th was a Thursday. Rent checks cannot be cashed on Sundays.

To get a good picture of collections, one should compare the first five business days. I bet that collections from the first through the sixth of March and April are materially closer than collections the first through the fifth.

Now, all that aside, we are certainly seeing a drop in rent collections. No doubt about it. And, many landlords are reducing rent, or forgiving portions of rent. No doubt that on top of not collecting rent from some tenants, many landlords who do receive rent will collect less than the full amount due.

You run BiggerPockets.com, which focuses on teaching people how to make money with real estate. How is this impacting your members?

When many people think of landlords they think of Scrooge, or “the man” – a faceless, nameless wealthy individual who wants to stick it to them. That, or perhaps a bureaucratic property manager/building manager.

While I don’t really know the large multifamily and apartment complex real estate market, I do know that this persona is not typical of the landlord on BiggerPockets. Our users are usually small landlords with just a few properties.

Did you know that 80% of the single-family rental properties (over 18M) in this country are owned by investors with 10 or fewer units? Or that 60% of single-family-rentals are owned by investors with just one or two homes aside from their primary residence? If we assume similar ownership characteristics to the duplex/triplex/quadplex market, then most rental property in the United States is owned by small private landlords, not institutions.

Our users tend to be these smaller landlords These are not billionaires or ruthless hedge funds. These are normally working professionals who own real estate in addition to their 401(k) and stock/bond portfolios.

About 80% of our members have household income of less than $150,000 per year. They are middle and upper middle class. While the vast majority of BiggerPockets’ members earn more than the 50th percentile in household income in this country, we have very few users who are in the top 5% or 1% of earners

Our users spend less than they earn, save, and invest their savings in stocks, retirement accounts, and real estate. Many of our users get started in investing by “house-hacking” – simply buying a home with extra bedrooms, or a duplex, triplex, or quadplex, and renting out the additional space to friends, roommates, or other tenants to help cover their mortgage payments.

Many simply keep the first home they purchase, and buy another, repeating this over a period of years. It’s a wealth building approach available to everyone in this country who can otherwise put themselves in position to buy a home.

To address your question, our members do not seem to be as impacted as the apartment owners in the WSJ study. We had over 500 responses to one forum thread on this topic. It appears that of those who responded (which may have inherent survey bias), over 90% of our landlords received 90% or more of their rents.

Many of our users have diverse tenant pool. For example, my tenants include a teacher, a retiree, one on disability, a construction worker, a healthcare professional, a warehouse operator, a barber, and a services professional. All have paid April rent.

I’m sure that the impact will be felt on a more significant level for our uses and perhaps myself in the coming months, if the economy remains shut down. We’ll have more data and understanding of the situation as the months pass. But, I’ll bet that things aren’t as bleak as you might think after reading that WSJ article.

What do you think about the Keep Your Rent movement? Do you think they’re all freeloaders or can you understand their position?

I’m not seeing in a widespread sense any set of demands from these folks. Typically, a strike, union, etc. centers around a set of demands for better conditions, lower prices, better service, better pay, etc.

The most notable thing to me about this is that what we are seeing here is simply a demand to stop paying rent. Entirely. And, to never have to pay that rent in future months.

That’s interesting to me and seems like an untenable long-term negotiating position. But, I’m also not clear on whether the Keep Your Rent Movement is attempting to present a negotiating position in the first place, rather than just simply keep their rent.

The Keep Your Rent folks kind of remind me of the “Occupy Wall Street” movement from a few years ago. It was also unclear what the agenda was there, other than to communicate anger.

I don’t think that this is a movement of “freeloaders”. No. I think this is a movement of people who are angry about rising rents and housing costs.

Why do you think these renters are so angry with their landlords, and do you think this anger is justified?

When I graduated college, I rented an apartment during my first year here in Denver. I did not enjoy paying rent. I did not enjoy the fact that the next year, rents were set to increase. I wanted to stop paying rent very badly.

So, I drove a cheap economy car – A Toyota Corolla – and eventually stopped using even that car in favor of biking to work. I brought lunch to work every day. I did not pay for cable. I did not go on fancy vacations. I ubered after work. I tutored after work for extra pay. I scraped and skimped and was able to put together a down payment on a very modest duplex about a year after I moved here.  

After fixing the place up, I was able to rent out the other half of that duplex to some tenants, and the other bedroom in my half to a friend and now business partner. This income completely covered the mortgage payment. I was able to live for free.

I’ve continued to live in a half-duplex to avoid having to pay rent and/or mortgage payments with my paycheck for that past 7 years.

I did this and do this because I don’t want to have to continue paying rent long term.

Perhaps “anger” is not the appropriate way to describe my emotion towards paying rent, but I certainly felt the pain, and clearly saw that long-term, rents were only going to increase, not decline. I wanted to be on the other side of that.

Landlords like myself and sellers of private property simply rent or sell at market price. Some give better/worse service than others, just as some tenants behave better/worse than others.

In some select cases, I’m sure that landords can be jerks, and tenants will gleefully strike against the landlord as an individual to get even on a personal level.

But, to answer your question directly, I don’t think that most renters have a particular problem with their landlords as individuals – again, some might. But, I think that the anger is probably more directed in a general sense to the cost of housing in this country.

Over the last ten years, we’ve seen real wage growth (wages after inflation) in this country.

However, this has not quelled the concerns of a large portion of the population regarding income inequality, wealth inequality and many people still feel that they are not able to make ends meet.

The largest and most notable inflation to many people is in housing costs – the costs of homes and rents. This is less noticeable in the Midwest, but inescapable on the coasts, where rents and housing prices have been increasing far faster than both the rates of inflation and wage growth.

I think that there are a number of issues contributing to this problem. And I believe that they all center around very traditional supply/demand problems.

These may include:

  • The steady rise in demand from migration, population growth and household formation
  • The steady rise in demand as real wages have climbed over the past few years
  • A decline in relative supply with a shortage of construction workers – resulting in higher labor and building costs
  • Higher costs of raw materials, perhaps in part due to tariffs
  • Difficulty in getting access to permitting in many local jurisdictions
  • Related to permitting, a concept called NIMBYism (Not In My BackYard)– few want to see massive housing construction in their neighborhoods
  • A simple lack of suitable land for construction in some areas
  • Lack of water or expensive water rights

It’s really difficult for most people to grasp the varying ways that all of the factors above (plus many more) contribute to housing costs. All that many people see is their landlord collecting rent checks, and their rent increasing. So, the anger about housing costs is channeled at the person that they actually see and pay.

An unfortunate truth for many is that the demand problem is not going away in this country. Instead, the folks who do have the power to actually reduce housing prices and rents, or at least slow their growth, are real estate developers.

Real estate developers are not the most popular group in the media (although we certainly welcome them on BiggerPockets…) . But, if you want to bring housing prices down, or keep them from growing quickly, you’ll have to either reduce demand or increase supply. And in America today, one of the few ways to increase supply dramatically is to reduce costs and barriers for developers.

But, just try legislating THAT as a solution. Many constituents will revolt. Homeowners don’t want development in their areas and don’t want new supply competing with their property values. Long-term residents see new construction and large-scale investment as “gentrification” and revolt.

Instead, what you get is a patchwork of permitting, rent control, tariffs, and more that all contribute even more to reducing supply long-term. And it comes from all sides of the political spectrum. No favorites here.

 

This interview went a bit longer than I thought it would, so we’re going to split it up into two, with the 2nd half being posted on Monday. The first question I ask in Part 2 is “Do you think that the people who participate in the Keep Your Rent movement should be evicted from their homes when this pandemic is over?”, so that should be fun…

 


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8 thoughts on “Keep Your Rent: A Real Estate Investor’s Perspective (Part 1)”

  1. I own (aka have mortgages on) two houses–each one I first lived in for 5+ years, then rented out when I moved. One of my renters failed to pay the rent on April 1st but has communicated that he’s been furloughed and will pay as soon as his unemployment and stimulus check arrive. I told him that I trusted him and would work with him, just as I have in the past when he’s had unexpected life events happen over the past 3+ years he’s been in the house. No troubles so far with the other renter, although they’re moving out at the end of the month due to a 2 year lease expiring. I think that just like Scott is saying, if you’re a small property owner and you have a good relationship with your renters then the relationship goes both ways.

    I would only look at evicting after the eviction holiday is up if my renters weren’t communicating in good faith, and if that were to happen, it would hurt them since I would definitely give a bad review to their subsequent landlords. For me personally, although I’d rather not have to pay the mortgage myself while this is going on, this is obviously something that I budget for and have a savings/emergency fund buffer to deal with when it happens–my expectation is that you should always expect to lose at least 1 month’s rent every year due to turnover/unanticipated problems and you should budget at least 1% of the total house price per year on repairs. If you can’t cover those expenses then you probably shouldn’t be in the rental business.

    1. Like everything else it seems the media portrayal of this situation is a bit overblown 🙂 Good to hear some solid statistics from Scott on the actual situation. Tracy’s comment on how to budget for repairs and vacancies is on the spot.

      From the tone of the article, and the responses received thus far, it seems most rentals are owned by individuals who seem financially conservative as a group. I wonder if there is a difference between coastal cities landlords and those investing in the midwest. Perhaps there is more leverage being used on the coast and landlords not being able to cover the costs of business. It seems there is more speculation on future price increase on the coast.

  2. Well said both Scott and Tracy. I have been a landlord for 14 years and over that time I have accumulated 5 rental properties. Fortunately, I received all rents on or shortly after April 1st. I have good personal relationships with all of my tenants and I made a point of reaching out to them before April 1 to see if any were financially impacted by the Covid 19 pandemic. I was prepared to work with any that were financially impacted, but “Keep your Rent” would not have been part of the negotiations.
    I have always tried to be a “good landlord” by quickly fixing any problems my tenants have reported. I have always tried to treat them the way I would like a landlord to treat me under the same conditions. I hope my tenants consider this when they consider movements like “Keep Your Rent”. In the end “Keep Your Rent” will equally hurt landlord and tenants. When the eviction holiday is over you can be sure landlords will evict tenants for non payment.
    If you are a tenant that is unable to pay your rent in full due to Covid 19 (or any other reason) I urge you to contact your landlord as soon as possible and negotiate in good faith. Show your landlord you are doing everything you can. It’s in both your interests to find a resolution other than eviction!

  3. As a perpetual renter myself, I totally agree with the landlords’ comments above and am against the Keep Your Rent movement, for a simple reason: we are all adults and we all have problems. It’s our duty to manage our difficulties and to avoid causing problems to others, particularly in this difficult period.

  4. I’m a landlord with three duplexes in Dallas in pretty working class areas along with an upscale condo in a trendy area. The duplexes are managed by a corporate property management company, and I was pleasantly that all 6 of those tenants paid April rent (one asked for a deal where they could pay 2/3 of it on the first and the remaining 3rd on the 15th which I happily agreed to). The physician tenant in my fancy condo also paid early, as usual. In a normal month I may only get 4-5 of the duplex rent payments on time so this was great. TBD what May will bring though. I’m hoping as unemployment and the stimulus checks start to flow in late April that people will be able to pay May as well.

    However I am also a passive investor in several large apartment buildings across the country (San Antonio, South Carolina, Chicago, Fort Worth, Baton Rouge), and the messaging from the managers of those has been quite different. I’ve invested through three different companies so the management and strategy is different across the board, but all are warning urgently of potentially dire consequences to our investments. For commercial properties like those, small changes in overall income can dramatically impact the value of the buildings because values are based solely in income and cap ratios – not on comparable sales or replacement cost like appraisals use for 1-4 family properties.

    One is a student housing building that’s been evacuated – previously unthinkable – and the college kids and their parents are surely going to balk at finishing out their lease terms. But then again presumably many of them have money so we’ll see. The rest are fairly blue collar, older Class B- properties (that were bought and renovated to become more like B+) that are full of the exact type of people affected by this – construction workers, bartenders, janitors, etc. who live paycheck to paycheck and struggle to pay rent sometimes even in normal times.

    We won’t get the April reports until the first or second week of May, but we just got the March numbers and they were already down. Two of these properties were about to be listed for sale because the model is a fix and flip one, and now we are stuck with them because no one wants to sell while rents are down – but the mortgages that were supposed to be bridge loans are expensive. The managers are seeking forbearance from the lenders, but the interest will still accrue and slowly – or quickly – eat away at any returns we would have made on the sales. Management on the others is scrambling to work with a growing subset of the tenent base not paying rent in April (per their commentary but again I haven’t seen figures yet) sometimes because they can’t pay but also often because they have heard they can’t be evicted. The assumption is that a large subset of these tenants will ride it out while they can’t be evicted and then simply skip out once evictions can resume. This is not the class of consumer who can or will save up and be able to pay 2-3 months worth of rent at any point in the future even if their jobs haven’t been impacted (if they could they wouldn’t be living in these buildings in the first place). Again, people skipping out on rent and leaving without notice is a fairly normal part of the business in these types of properties. An increase in that though could be catastrophic at least in the short term. Commercial investments like these aren’t set up to accumulate 6 months of reserves like small landlords do. They’ve already suspended investor distributions, but capital calls will soon follow I’m sure. Then…who knows. Hopefully it all blows over in a few months.

  5. It seems likely that landlords and real estate investors alike will be paying a price in the coming months for the income and wealth inequality that Scott referenced, certainly in the U.S. And yes, lack of affordable housing – but I see that as driven by the income/wealth disparity.

    As Elizabeth said, there are many people that live paycheck to paycheck who can’t weather even the smallest storm. What she didn’t note is how large this cohort is. Based on WID data, the bottom 50% of people in the U.S. by income average $16,000 annually, up from $15,000 in real dollars five years ago – a number that has been static for almost 40 years. That means going without – or with significantly reduced – wages for a few months can be truly catastrophic for a significant portion of the population. How fast the economy recovers will play a role – but it seems likely that the impact will be felt longer than anyone would like.

    Some of us reading this blog may be able to count ourselves fortunate to have cash reserves, and to be able to hold on to shares in REITs we’ve invested in longer-term to ride this out. However, I’d like to believe that my stake in this issue goes beyond the share price of VNQ. Recognizing that landlords large and small have mortgages and taxes and other expenses to pay, and rely on timely rent payments, and also that you can’t get blood from a stone, I hope that we as a society will find a way to ensure mass evictions are avoided. I don’t see that as a solution that will be good for anyone – renters, landlords, investors, or our communities.

  6. I’m not going to lie. I was scared of what the Coronavirus would cause because I knew that many people would either not be able to pay their landlords/loaners. I thought this would lead to a housing crash. However, hearing about things like this give me hope that the housing crash will not happen. Without a housing crash it is possible the worst of this crisis will not be much worse than it is now, assuming we have not seen the worst yet (not very likely, but I am optimistic).

    I hear about people asking for a tenant strike in Philadelphia, I’m not sure how it is going, but everytime I hear about it, people say “we’re not lazy nor want to freeload, we just want to spread awareness about how landlords take advantage of tenants.” No revolutionary received the title because they refused to pay for a transaction they have agreed to. Every transaction is a win-win. You get something by paying for something. Unless you were scammed you got something out of the transaction, a place to live.

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