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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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