What should landlords do when tenants can’t pay rent?

This is the third story in a four-part series on rentals in the time of coronavirus. Read other installments of the series here:

Inman’s state-by-state guide to evictions, rent and foreclosures

Fear and uncertainty is mutual among renters and landlords: Poll

Can landlords discriminate based on a tenant’s job? It’s complicated

When the economy started tanking last month, Gwen Daubenmeyer began checking in on her tenants. Daubenmeyer leads the Integrity Team at a Keller Williams brokerage in Michigan, and told Inman she also owns two houses that are currently rented out. And she soon learned that one of her renters was in trouble.

“That tenant is laid off,” Daubenmeyer said.

Daubenmeyer’s tenant is one of more than 9 million people who have lost their jobs during the ongoing disarray from the coronavirus. Many of those people were this week faced with the prospect of paying rent for the first time during the crisis. It’s an unprecedented situation that, especially for smaller landlords, may represent an existential financial threat. But it’s also one that’s forcing rental professionals to grapple with new ways to balance cash with compassion, which is raising questions about ethics in a time of suffering.

The crisis

That a rental crisis was looming has been clear for at least several weeks now. The first hints of trouble surfaced when the stock market began tanking. Later, cities and states responded to widespread business closures by enacting eviction moratoriums and other policies to protect tenants. At the same time, calls for rent freezes have become increasingly common.

Meanwhile a new survey found that more than 50 percent of renters reported being unemployed last month — a discovery that suggests that the economic chaos has in many cases fallen first on the shoulders of people living in property that someone else owns.

The entire country, it seems, has been bracing for the moment when millions of unemployment claims translates into millions of unpaid rent checks. And while April 1 represented the first potential pressure point, there are likely to be others.

“When I reached out to the tenant, she said, ‘We’re okay for April,'” Daubenmeyer said of her renter. “But beyond that we’ll see.”

The consensus

As the depth of the crisis have become clearer, a number of prominent industry voices have emerged to take a stand. For example last month, Ben Caballero — who has repeatedly been ranked the top real estate agent in the U.S. — tweeted that at his rentals he would “suspend all late fees and evictions for those afflicted until further notice.”

Hours later, a group of large landlords in New York City made a similar pledge.

A few days after that, the California Apartment Association (CAA) — which advocates on behalf of property owners and landlords — also called for a halt to evictions. On it’s resource page for landlords, CAA explicitly asks property owners “to act with compassion in dealing with residents who face coronavirus-related hardships.”

Taken together, all of this suggests a consensus is forming.

Though different states currently allow property owners to do different things — California has banned evictions, Alabama has not — the rental industry appears to be coalescing around the idea that people shouldn’t be evicted during the crisis even if they can’t pay rent. In other words, there appears to be agreement that the right thing for landlords to do is give their tenants some leeway.

The response on the ground

For many mom and pop landlords, however, giving people leeway is easier said than done.

While large institutional investors might be able to weather a hit, the U.S. Department of Housing and Urban Development has reported that there “are between 10 million and 11 million individual investor landlords managing an average of two units each, many with just one unit.”

In some cases, those mom and pop landlords are relying on their handful of rentals for basic income. In many other cases, property owners have mortgages on their rentals, meaning a lack of rent could theoretically put them at risk of foreclosure. And it’s likely for those reasons that a recent survey found that smaller, DIY investors will likely suffer the most in the current crisis.

Industry professionals have been divided on what property owners with rental shortfalls should do, but a number of agents who spoke to Inman for this story advised everyone involved to look for humane solutions.

“Let’s look at the golden rule, do unto others,” David Hinkley, a member of the Brodkin Group at Home Connect in the Las Vegas area, told Inman. “Put yourself in your renters’ shoes. What if it was you asking for leniency.”

Hinkley himself owns a commercial property in California where a tenant has fallen behind on the rent. The issue existed before the crisis, but will likely only be exacerbated by current economic troubles. And Hinkley was frank that the situation doesn’t have an easy solution; he has encouraged the tenant to get a small business loan, though its not clear if that will ultimately address the shortfall.

Hinkley’s situation with his own tenant thus remains unresolved for the moment, which is likely the same boat many landlords now find themselves in. But however things play out, he said owners should look for ways to work with their tenants rather than just playing defense.

“I just feel like it’s worth it to work with them if you have a good tenant,” he added.

Daubenmeyer similarly urged real estate investors to find a balance between compassion and finance.

“If my tenants get in trouble, I feel like the first thing I need to do is be as responsible as I can without harming my family or myself,” she told Inman.

In instances where renters fall on hard times, but landlords have mortgages, Daubenmeyer suggested cutting the rent down for a limited period so that it merely covers the cost of the property. The idea is that even if short-term profits disappear, renters aren’t kicked out amid a crisis and landlords get to keep their tenants.

“By and large, everybody wants to maintain where they live,” Daubenmeyer added. “Tenants are not looking to rip landlords apart.”

Given that evictions are increasingly banned across the country, some landlords may also simply have to accept that they “have an investment that isn’t paying off right now,” according to Marguerite Martin, a Windermere agent in the Tacoma area. But Martin also pointed out that even in such circumstances, landlords still likely have more resources than their tenants.

“You could tap your equity,” she suggested.

Either way, though, there’s not a single solution for landlords and renters who suddenly find themselves staring at each other across a financial chasm.

And for that reason, Bernard Cervantes suggested that open communication — which a new survey found is lacking in the rental industry right now — is the best first step. Cervantes is a Keller Williams agent in Riverside County, California, and told Inman that while rental situations vary considerably, people trying to understand each other is good for both them and their future business.

“Communication is going to be key,” Cervantes said. “A big part of business is relationships. So even though we’re all hurting and strapped financially, you need to keep that relationship intact anyway you can.”

Additional resources:

Inman has compiled an eviction and foreclosure guide with links to resources in each state.

The California Association of Realtors has also put together a number of resources related to rentals and the pandemic in the Golden State. The CAA is also offering advice for landlords.

Email Jim Dalrymple II