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This is Part 2 of my interview with Scott Trench, CEO of BiggerPockets.com, one of the internet’s biggest real estate investment websites, in which I asked him about what he thought about the Keep Your Rent movement that’s been all over the news lately. If you haven’t read it, please read Part 1 first.
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?
Imagine a tenant who has been renting for several years, who has great credit, and who works in the services industry. This tenant is laid off abruptly. They can’t access their unemployment because the local office is overwhelmed, don’t receive their stimulus check for another month, have no other streams of income or savings, and have no access to credit. This person can’t feed themselves or their children.
Along comes the big bad landlord. Who has no pity. Who has no mercy. Who demands rent in full and on time, tacks on the late fee, and files eviction the moment the courts reopen.
I’ve talked to hundreds of landlords, and read from thousands on the forums. Almost none of these landlords exist, at least not on BiggerPockets. Almost all of us are willing to work with someone who is completely broke, and has otherwise been a great tenant.
We are seeing landlords forgive rent for some folks like this. We are seeing landlords cut rental rates significantly. I hear the horror stories, but they seem as unrepresentative of landlords, as the horror stories of tenants who sell drugs, hold property hostage through “squatting”, and destroy homes are of tenants.
Some of these landlords will go on to make headlines. But I do not believe they are representative of what we are seeing on BiggerPockets, and, I hope, the larger community of landlords out there.
The question here isn’t about those who are laid off or furloughed and are truly unable to pay rent in the short-term before their unemployment checks and government stimulus checks some in. It’s about the renter who is otherwise employed or receiving unemployment, who is not communicating with their landlord, and who is striking when otherwise capable of paying.
In a practical sense, this probably won’t happen en masse, and probably isn’t happening en masse. This is because, to answer your question directly, yes, these folks can and likely will find themselves accruing rent and late fees. And yes, when courts reopen, landlords will file for eviction, withhold security deposits, sue for back rent and late fees, and in many cases bankrupt the rent striker.
Most people who are otherwise capable of paying rent will pay rent, because the cost/benefit of striking is likely not there for a typical tenant.
Let’s examine in detail:
First, landlords are typically much better capitalized than tenants. They typically run their businesses with a reserve for precisely such an event as loss of rents, or unexpected large repairs. In the normal course of business, we get tenants who stop paying, who we have to evict, and who leave the property in poor condition afterwards, forcing us to clean and remodel it. This happens even in the great economy we experienced over the past 5-10 years.
Most investors (60%+) on BiggerPockets have at least 6 months of reserve for their portfolios. Meaning that they could pay their bills without ANY rent at all from any tenants at all for six months. This reserve is usually held in cash. Many landlords also have access to lines of credit on top of this. Some landlords have even more cash reserves than I discuss, and on the low end, at least 85% of landlords surveyed have a 3 month or greater reserve fund.
It appears that one of the goals of certain Keep Your Rent groups is to inflict financial pain on the landlord. This is an additional goal above and beyond simply not paying rent. To achieve this goal, the tenant will have to strike for many consecutive months, in unison with other tenants. And, they have no way of knowing just how long the landlord can hold out before having a liquidity crunch.
Furthermore, many landlords have a diverse tenant pool. I referenced earlier that some of my tenants are on disability, are retired living off social security, are teachers and healthcare workers. These folks are unlikely to get laid off or lose their income streams in the near future. The Keep Your Rent movement will have to convince these folks that the there is something to be gained, other than a few months of rent, in exchange for the eviction and lawsuits that loom as consequences for non-payment.
Second, landlords have security deposits. This is typically one month’s rent. It is kept for precisely such an event as failure to pay rent. It will be kept by landlords in the event of non-payment of rent or damages. This means that the rent strike achieves absolutely nothing, financially, for the rent striker in the first month. Only after the first month, do they begin to have a chance to pay less net rent overall.
So, no benefit to the rent strikers in month one. And no pain to the landlord in month one. If the courts reopen in early May in most jurisdictions, then this high stakes game of chicken is totally ineffective for the renter. All the consequences, none of the benefits.
Third, a rent striker will still accrue rent, late fees, and be liable for any damages to the property. When the courts reopen, landlords will file for eviction, sue for damages, and in many cases, bankrupt rent strikers.
Again, I don’t think this will be the case for a large number of tenants who have open communication with their landlords and who truly are out of luck. But, this is certainly a tool at the disposal of the landlord dealing with a rent striker. \
Let’s take it to the extreme. Suppose we actually see a group of tenants band together, tstrike for a prolonged period of time, and force a poorly capitalized landlord to lose the property or go bankrupt. You can be sure that this landlord or his/her successor will evict, bankrupt and sue each and every one of the rent strikers
This is mutually assured destruction. No one wins. But the landlord loses an income stream and asset. The tenant loses their home, has an eviction on their record, and likely ruins their credit.
That doesn’t sound like victory to the rent striker to me. And remember, even this outcome, pain for the landlord, only occurs if the landlord is poorly capitalized, if many tenants band together, and if the courts remain closed for a long period of time.
Do you have any advice for landlords that are affected by this?
My advice to landlords is the same as always. Analyze property for cash flow with conservative assumptions. Recognize that recessions or “black swan” events are absolutely going to occur every 5-10 years or so. Carry reserves. Treat your tenants – your customers – with dignity.
And, screen your tenant applicants. Above all, check their credit.
In all my interactions with landlords regarding tenants over the years, I have yet to hear a single anecdote about a tenant with good credit who as a problem tenant, or did not pay rent. All of my issues with tenants have come from tenants with poor credit, or who I inherited (were renting the property before I bought it) and had unknown credit.
I am absolutely sure that there are some tenants with good credit out there who miss payments or cause problems. But, I’ll bet that they are the rare exception that proves the rule.
I’ll just state it plainly; tenants with good credit will not participate in a rent strike in any meaningful numbers. At least not unless they are well and truly out of luck and have no luck communicating with the landlord. Tenants with good credit won’t jeopardize their credit for a short-term gain. Tenants with good credit don’t destroy property.
There are many people who have bad credit and who make for fine tenants. There are many reasons why an otherwise good tenant might have poor credit. But, that does not diminish the fact that the credit score is by far the single best screening mechanism available to landlords. In addition to income verification, reference checks, and criminal/eviction history, the credit score is the key to long-term success with tenants, in my opinion.
Aside from that, invest for and run your business for the long-term.
You can never tell what the cause of the next recession or loss of income will be, but you can plan for it effectively by simply being conservative when you buy, being conservative with your financing and reserves, and operating effectively. Over time, through the ups and downs, real estate is a great income generator and wealth builder.
Do you have anything you’d like to say to the rent strikers?
Understand the costs and benefits of a rent strike and know what you want.
Recognize on the costs side that the first thing to go will be your security deposit, that you may accrue late fees and past due rent, and if you are just out to hurt your landlord and not pay rent with no other agenda, that your landlord can and probably will sue you when this is over, making it very difficult for you to get access to future credit and housing.
If you are one of those people who lost your income source due to coronavirus, have no savings, don’t have unemployment or other sources of income, and have exhausted all other reasonable options, then it’s a good time to reach out to your landlord and tell them about your situation as honestly as you can.
As I’ve discussed, the vast majority that I’ve come across seem ready willing and able to work with their tenants through this.
Scott, thanks for being with us today and contributing your thoughts on this crisis. Stay safe out there. If you want to know more about Scott and his site, check out BiggerPockets.com
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One thing to think about, not sure about other Countries. If the State or Government keeps a business/landlord from functioning. Collecting rent or getting new tenants they have opened themselves to be financially liable for your losses.
When the Government takes something from you they are mandated to give you something for it. With a business it would most likely be a tax credit or some later program agreeing to pay businesses the amount lost/rent for the action not taken such as eviction.
Besides the business themselves which may simply agree to work with renters to get through this.
Luckily, our tenants (2 units) have solid jobs and they can pay the rent. It could have turned out a lot differently. Last year, it took a long time to rent 1 unit. I almost rented to a student, but she backed out. She has good credit, but she probably would have a hard time paying rent in this environment. Anyway, I would work with my tenants first before taking more drastic measures. It’s all about screening. Whew!
I love the cost benefit analysis you went through. It makes no sense whatsoever to the people who rent to actually strike. If they get evicted and ruin their credit they will be forced to go through short term, high rate accommodations such as hotels or airbnb. I’m sure there will be places that would take them, but they would likely be in inconvenient locations or run down.
This is another situation where the people who are better at managing their finances, both renter and landlord, will be better off in the long term. Another reason to always live below your means, save, and invest.
Not sure if he’s just naive or being a dick, but yes, plenty of landlords have been screwing over renters for years. And yes, plenty of landlords are being assholes to renters who have been furloughed and laid off. This is such a dumb, one-sided, ill-informed attempt at answering actually strong, interesting questions.
yes!
we are reviewing our new lease and the landlord wants us tenants to pay what he/she calls “property tax service”. How is that possible? how is it possible for landlords to hide so many commitments/fees/awful traps in a contract and get away with it. It is BS that the tenant’s anger should be directed towards the low supply of real estate because landlords are only re-evaluating/increasing rent based on the local market.
My husband and I are smart and ahead of the pack by reading the agreement; we can also afford rent. I know my neighbors are not in a position to do either which breaks my heart.
KC – it’s sad to hear that your landlord is attempting to sneak fees in through the lease. I use a standard lease, templated by the company I work for, and walk tenants through it with any questions.
Hi Bob – thanks for your comment! I’m absolutely sure that there are some real jerk landlords out there. However, having met thousands of landlords over the years, it appears to me that they are the exception. It is possible that there is a massive community of jerks out there that I am not aware of, exhibiting different behavior than I am used to seeing, and “screwing over renters”. But, as far as I and most of my peers are concerned, the objective is to consistently build long-term wealth over a career. For that, we need quality tenants, and to deliver a quality product that they are comfortable with. The best tenant is a happy tenant, who loves their home, and stays for many years. Screwing over customers like that is simply bad business. Those landlords won’t last.
We have two tenants in the USA. One of them is paying on schedule and the other one has been asking us to pay in two installments as their financial situation isn’t stable. We were supposed to not renew the lease of that second tenant because of their financial situation but due to covid19 we need to wait and are renewing their lease on a month to month basis until they can move out. I totally agree with Joe about the fact that it is really IMPORTANT to screen your tenants!
As for our tenant in France, he is also paying his rent on schedule so we consider ourselves overall pretty lucky during this pandemic to still be able to rely on rent payment as part of our passive income that we use to fund our lifestyle.
Thanks for the comment!
I was actually wondering if this is a paid post. Here’s what I read. Tenants participating in a rent strike who are still employed or receiving benefits will be punished…but the rest of you not paying rent…will not be.
Uhmmm…how do landlords distinguish those two groups of non-payers?
Answer: The landlords won’t distinguish. They’ll punish all of them. The only thing stopping them from doing it now is gouvernment legislation.
Let’s not be naive. The answers provided on this blog post as well as part 1 are BS and we all know it. Look at the number of comments to each. Nobody buys what is being said by BiggerPockets. Sounds more like a marketing ad “Hey, join BiggerPockets. We’re great. Our members are all so smart. As a landlord, you want to be smart too, right? Join BiggerPockets and you will be. Heeee haaaa!”
I know garbage when I smell it.
I get the sense that the bad landlords that you and Bob are referring to have no interest in seeking out a site like this, and even if they did, would they willingly own up to being a bad landlord in comments or in any article, or even a BiggerPocket poll? I agree with Scott Trench that credit score is a key marker, and that communication between the renter and the landlord is key. So I agree with you and Bob that this article (parts 1 and 2) are one-sided, but I don’t think we’ll ever get to hear from the bad landlord side.
No worries. We all know they exist, even if they only come out at night. We can’t easily track and document them, yet we can be assured they are plentiful and nowhere near extinction. Lol
Dave – How can landlords distinguish between two groups of non-payers?
I have 8 tenants. I know these tenants. They communicate with me. I did background checks, credit checks, and ran eviction history on all of them. I called their references before I signed their leases. I regularly communicate with them.
I see, however that I am not likely to convince you of your perception of the evil landlord. I wish you the best, and hope that one day, you are able to see both sides of the equation.
I’m just curious why you seem particularly concerned with the perspectives of landlords, having devoted several blog posts to them. It might be insightful to interview from other points of view.
Sponsorship. Just like the financial advisors criticised for telling a one sided story on funds and management fees, everyone’s willing to give a one sided story for a buck.
Who says there won’t be a Part 3?
I mean, *I* have no idea, obviously. But it seems reasonable that they’d want to devote one article to interviewing a “representative” of the landlords and a third part interviewing a “representative” of the tenants.
I doubt Wanderer and FIRECracker are about to start shilling for landlords considering that they are lifelong renters and advocate renting.
I also doubt that this is a paid promotion. By law, bloggers have to tell their readers if they are providing sponsored Content. I do all the time (long before I even knew it was a law) and Bryce and Kristy have always been on the up-and-up.
Plus, even if this WAS a paid promotion. Let’s say there was a third part where they interviewed someone representing the pro-tenant point of view. Would that really be so shady? It would be a great way to accept money to allow someone to advertise on your blog AND provide fair and balanced viewpoints.
I do wish they asked some more hard-hitting questions, but they’re FIRE bloggers, not investigative journalists.
Sincerely,
ARB–Angry Retail Banker
Thanks for the comments here, Ana, ARB, and basketcase. This was not a sponsored post, Kristy invited me here to discuss this topic, hopefully because I have been a student of the topic, perhaps more than most.
yes!
we are reviewing our new lease and the landlord wants us tenants to pay what he/she calls “property tax service”. How is that possible? how is it possible for landlords to hide so many commitments/fees/awful traps in a contract and get away with it. It is BS that the tenant’s anger should be directed towards the low supply of real estate because landlords are only re-evaluating/increasing rent based on the local market.
My husband and I are smart and ahead of the pack by reading the agreement; we can also afford rent. I know my neighbors are not in a position to do either which breaks my heart.
is it possible for you to make a post about how to find a good rental/good landlord? I am thinking of a semi-stable arrangement (2 – 3 years). I know your stance on buying real estate, but as a tenant (previously a home owner) I am starting to believe we just traded home related issues with management company/landlord related issues including unfair/questionable increase and hidden fees at time of contract renewal.
KC – Great question! Here’s what I’d do as a tenant looking for a great landlord:
1) If I’m renting at a large complex or from a large corporation, I’d look for reviews on Google, Yelp, etc. I’d also interview current/former residences, or just even ping them with an email or social media outreach and ask them if they enjoyed their stay.
2) For a small-time landlord, single family property, or duplex, your landlord is likely to either be the owner, or a property manager. If a property manager, search the company online and look for reviews, same as above.
3) If your landlord is a private individual owner/operator, then you will want to do some diligence on the landlord, just like they will likely want to do diligence on you. You might ask to speak to the previous tenants. You might google the landlord and see if they have an account/reputation on BiggerPockets.
If you can’t find any information, you might ask the landlord how they got started as a landlord/investor. This will give you information about how long they’ve been in the business, how many properties they own, etc. An experienced landlord is likely to have a personal track record of executing on, or quality contacts for plumbing, handymen, and other maintenance professionals. They are unlikley to let the property go into disrepair. IF there is a potential challenging situation, they are more likely to have a reasonable, business-minded approach and clarity on how to handle things.
Hope that helps!
Being a landlord is not the same as being the federal government, landlords can’t sit there and hand out freebies all day long and let budget go negative. Unless the lease is signed with the terms that rent can be deferred if there is a job loss, then the tenant board Or the government really shouldn’t be interrupting with evictions.
Apparently, you did not consider the risks of being a landlord. It is a business like any other and if you didn’t take the time to consider the potential risks, you have no one to blame but yourself for your current circumstances.
I think you are both right! I see no reason why we should be cancelling rent, evictions, or foreclosures right now. A failing landlord should go bankrupt.
Real estate (traditionally) was considered good investment as long as the property price was rising and the property could be rented out. It seems like there is an increasing expectation that even though landlords have invested their money, they should somehow also be okay with renters getting away with not paying.
I think renters need to understand that this is a business like any other. If you don’t expect a Starbucks to provide free coffee on an ongoing basis, then it’s just dumb to expect to live in someone’s house without paying them.
Reading through these expectations of people that landlords (who are at most times just regular people and not large businesses) should automatically be financially impacted due to the financial worries of the renter, is extremely worrying.
This is one reason I will be extremely skeptical about investing in real estate unless the property management company keeps paying me even if the renter defaults their payments.
I know there is a drive to paint anyone suffering from financial woes as ‘victims’, but the people who have done financial planning for downturns are not the ‘evil’ people here. If anything, a person who squandered away any earnings on ‘designer’ stuff without any financial planning for worst case should in fact deserve to face the consequences of any downturns.
Like they keep saying, “Failing to plan is the same as planning to fail.”
All of our tenants paid in April but that doesn’t mean they may not run into financial difficulty later. We’re taking a wait and see approach before making any predictions. This recession/ depression/ Great Cessation has just started and the collateral damage from the slowdown has not been fully absorbed.
Hi. My comment is directed to a statement made…. the security deposit should NEVER be used as last month’s rent. This is a recipe leading to tenants leaving a unit in bad condition when they move out. While I am flexible as to payment terms and will work with all tenants to reach a compromise, negotiating with the security deposit is “off limits”. Also, we consistently require first, last and a months rent as security deposit before moving in, so this has shielded us so far… and I agree that we have just started on this journey and it will be a month by month process to see whether rent payments are made.
Great comment here. In many local jurisdictions, the rules around what can be collected at lease signing differ. In many places the amount of the security deposit is capped by the law, or dictated by the local market competition. I’d bet that most landlords around the country are forced to accept just first months rent and security deposit at lease signing due to a blend of factors. But, if you can insulate more, that’s great!
LTB Tribunals seem to be used as cash generators for the Government. If a landlord has a reason to apply to LTB the Tribunal fees have to be prepaid. Only an indebted or destructive tenant can cause this situation. A landlord with a successful application, in most cases still needs a small claims case to also be successful. A tenant that can not or will not pay rent has put a Landlord in this position. What choice does a Landlord really have? Wait for a cash broke tenant to call? Good luck. It is clear that the Ontario Government knows this very well. Mr. Tory says treat tenant like a customer. If a customer steals from a business there is a law. A tenant steals rent there is unlimited protection from Mr. Tory and Mr. Ford. Government like Lawyers go after the money. Landlords have property and tenants now have more debt. It is quit clear that our Provincial Government has devised a system that allows indebted renters protection. A Divisional Court Appeal can be used by any evicted tenant to buy months and months of time, which courts again are paid for applications to recover property that a tenant is holding. A tenant only has to pay a part of their due rent rent to a lawyer to push an appeal. Wonderful system for Lawyers Government and indebted tenant. Perfect system except for landlords. Landlords need to know YOU HAVE NO RIGHTS.