Managing Real Estate Cash Flow During Eviction and Mortgage Freezes
The US has not seen such unprecedented action toward housing since Hurricane Maria in 2017. The Coronavirus is not only affecting the health of people everywhere, including your tenants, but it’s also affecting their income and job status– which means eventually, it will affect you as a landlord as well as your bank.
If you are new to real estate investing or considering becoming an investor, what do you need to know to weather this crisis?
In this article, we’ll discuss basic tactics to manage your cash flow, plus how to negotiate with banks and deal with tenants in a time of crisis.
What is Cash Flow?
Some landlords consider any cash coming in the form of rent to be cash flow. This is also considered gross rental income, meaning the total before paying out for expenses such as a mortgage, utilities, taxes, insurance, repairs, vacancy allowance, escrow, and any other expense you pay as a property owner.
For the sake of this discussion, cash flow is your net cash available after paying all those expenses. This is the amount you could reasonably claim as an owner’s withdrawal from the gross rents.
How to Manage Month-to-Month Cash Flow Responsibilities.
When you own property, you act as the middleman or woman between the bank and the tenant. Technically, your tenant pays the mortgage and all of the expenses. Your job is to manage those payments.
As the owner, you receive the rent, pay all of your expenses, and put some cash into your bank account. This helps you keep business accounts and personal accounts separate for accounting purposes, and prevents any risk of commingling funds.
Besides the account for regular and recurring expenses, you need to fund accounts for:
• reserves
• savings
• escrow
While these funds are all basically savings accounts, when you separate them into designated categories, you know which fund to borrow from should the need arise.
From a banking perspective, reserves represent all the money you have sitting in any bank account for any purpose. When the bank considers your finances for a loan, the banker looks at reserve amounts to make sure you have a certain amount available, ranging from 10-20% of your cash-on-hand. This varies from bank to bank and is based on your loan type.
When you deposit rent into your business savings account, consider keeping a repair fund of 5% of the gross rent a month plus a vacancy amount of 5% of the total rent a month. These are good rules of thumb, so the money is there when you have a vacant unit, or you have a more significant repair such as a furnace or roof.
The escrow account is where you put away monthly tax payments, monthly insurance payments, and security deposits. Most counties require a lump sum or quarterly tax payment. If you don’t pay these taxes as a one-time payment at the beginning of the year, you can create a savings schedule like this:
• Pay the first installment January 31 from money saved the previous November and December.
• Pay the second installment March 31 from money saved in January and February.
• Pay the third installment May 31 from money saved in March and April.
• Pay the fourth installment on July 31 from money saved July and August.
Setting these tax funds aside – along with an extra amount for insurance– you can get ahead of your payments and not worry when property taxes and insurance come due.
When you take these steps to manage your cash flow during the best of times, you can make sure your expenses are covered during a crisis such as the one we face now with the Coronavirus.
The Uncertainty Has the Whole Economy Turned on Its Head.
Many people are out of work (or may soon be) due to a mandatory self-quarantine. As a result of anticipated income interruptions, the Federal government has introduced a bill calling for a temporary moratorium on foreclosures and evictions.
Many landlords in high-population cities are also calling for legislation to freeze mortgages as some will not be able to pay their mortgage if their tenants are unable to pay rent.
What is an eviction and mortgage freeze? This temporary moratorium is extended by the Department of Housing and Urban Development and the Federal Housing Finance Agency. These agencies control government-backed loans through Fannie Mae and Freddie Mac. The moratorium is in place until at least the end of April, but to date, no specific time frame has been given. This will have the most significant effect on tenants receiving Section 8 assistance for housing.
This eviction and mortgage freeze doesn’t currently cover conventional loans. So what can you as a landlord do if tenants can’t pay rent, and you do not have reserves set aside for this type of situation? It’s time to negotiate.
Negotiating with Banks.
First, let’s be clear: at Rentometer, we are not experts at negotiations and don’t know if banks will bend on their mortgage contracts. But as a landlord with a mortgage to pay, you will never know if you don’t ask.
If this is a situation you see coming your way, the best course of action is to be proactive and call your bank to discuss options. Asking the bank to consider adding mortgage payments to the back end of the loan might be a reasonable request. We must emphasize this is an untested tactic! If you can cover payments during this time, it is best to do so. The crisis won’t last forever, and you want to do everything you can to avoid the possibility of losing the property due to a temporary situation.
How to Manage Tenants During a Crisis.
If you have tenants who receive Section 8 housing assistance, you will have to deal with the fact that the Federal government is giving them a rent freeze. However, that doesn’t mean you need to call them all up and tell them not to pay their rent. Best case, they will take their rental leases seriously and make arrangements to pay their rent on time. Here are two tactics you could consider that will allow you to bend but not break during this time:
• Allow them to miss one or two payments; divide the skipped payments and allocate over the remaining payments for the term of the lease.
• Consider partial payment, with the unpaid balance divided over the remaining year.
You may have to hold out a couple of months without receiving a rent payment from your tenants. With an eviction freeze, your only recourse is to work with them. Of course, if they are stable tenants, that’s what you would want to do in any case. If you have been a good steward of your gross rents, you should weather this storm just fine. And when it passes, you might be able to purchase a few more rentals from landlords who didn’t plan for emergencies. You can use the Rentometer tools to see if a new purchase will cash flow for you.
Real estate always bounces back, even if no one can tell us the timeline. If you planned well and set aside reserves, you should be able to stay the course. If you are short on reserves, your best option is to negotiate with both the bank and your tenants proactively.
Source: rentometer.com
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