Coronavirus Updates

My Tenants Are Paying Despite Coronavirus—and I Think I Know Why

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
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Modern apartment buildings exteriors or Contemporary Architecture Office In The City.

The premise is simple—apartments will prove themselves to be one of the most stable investments during this pandemic. The rationale behind the premise is based on several factors:

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  • An apartment is a home for all those who can’t afford a house.
  • A home is a necessity.
  • The legislators and the Fed alike are invested in protecting people’s housing.

Yes, my own belief has been that while we will certainly have struggles in the short-run, apartments will ultimately outperform other investment vehicles coming through the COVID-19 pandemic. 

So, now that we are in the final few days of April and have gained a meaningful perspective on both national statistics and the performance of our own portfolios, is this belief being validated?

Let’s talk.

Vast Majority of Renters Are Making Payments

The National Multifamily Housing Council (NMHC) recently reported on the findings of their rent payment tracker. Data show 89% of the households in apartment communities across America made a full or partial payment toward April rent. 

Put into historical context, NMHC tracked the same thing this time last year and found that 93% of renter households made at least a partial payment toward rent. This is a -4% apparent impact due to COVID-19. Further, relative to last month (March), April lagged -5%, according to the NMHC payment tracker.

The fat lady hasn’t sung yet. In fact, she has barely started warming up her vocal cords. But whether it’s -4% or -5%, I tend to think that relative to the calamitous losses in other investment classes and vehicles, multifamily has to be viewed as doing pretty well. 

Related: Landlord Emergency Preparedness 101: What Real Estate Investors Should Do Before Disaster Strikes

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That said, we have to acknowledge that the above-mentioned numbers track the act of payment by focusing on how many households paid. The numbers do not track the amount paid.

In other words, say we bill out $1,300 of rent in April, but the resident paid $500 and executed a PTP for the rest. While they get counted as having participated in the activity of paying rent, relative to actual collections, we are behind since we received only a partial payment.

So, let’s dig in a bit. 

(Note: Let us not overcomplicate for now and leave the issue of accounts receivable and how it may play out in the coming months for another time.)

Even More Renters Are Paying in Higher-End Communities

As per our normal management infrastructure, we receive weekly reports from all of our on-site managers, capturing a number of vital statistics. These reports are not something specific to the COVID-19 pandemic. This is simply how we routinely keep track of things.

In April, however, we’ve implemented daily reporting across our Phoenix portfolio to help us dial things in.

As of April 23rd, 97% of residents across our portfolio have paid full or partial rent. This is compared to the national average per NMHC of 89%. However, our collections, as represented by bank deposits, are trailing at -8% relative to the same timeframe in March.

Both of these numbers require further qualification.

Among the assets we’ve owned for 12 months or longer, where we’ve renovated at least half of the units and completed most of the community amenities, we experienced 98% of residents making rent payments and collections are down by only 5%. On the other hand, at assets we’ve owned for under a year, only 96% of tenants made a full or partial rent payment and collections are trailing March by 11% on average.

Related: The Essential Importance of Cash Reserves in a Crisis

Making Sense of the Numbers

Actually, this has been an increasingly satisfying exercise for us thus far. Why? Because we are watching theory become reality.

We purchase underperforming assets where we implement extensive value-add programs. Our typical interior scope is $11,000—more if we are installing washer/dryers—plus whatever we need to spend on the community amenities. 

The thesis behind spending $15,000-$30,000 per unit all-in is to completely re-position the property in such a way as to attract a higher qualified tenant profile and lift rents by $250-$400. Clearly, the objective is to improve value, but that’s not all.

In times of economic distress, there can always be observed a flight to quality. People who have quality are less likely to part with it, and people who couldn’t afford quality before look for discounts allowing them to upgrade. 

Simply put, you want to own quality when there is an increased demand for it.

That said, I am of the opinion that doing extensive renovations not only allows us to grow revenues in good times, but it also protects our downside in bad times. And for this reason, I think it’s absolutely critical to continue the implementation of the value-add programs we’ve begun. 

The reality for many apartment syndicators is that they got into deals with insufficient reserve capital, which means that in times of stress, they must shut down their CapEx projects in order to reallocate capital to operations. However, while this may be prudent in the immediate future (if you don’t have enough reserves), freezing those projects is the exact wrong thing to do relative to future success.

Those CapEx projects are the thing that makes your asset better than the competition, keeps the asset from becoming functionally obsolete, and helps the asset to qualify itself as “quality” in the eyes of the potential residents. This is precisely why my company goes into deals with nine months of debt service reserve in every project, as I discussed in my last article. Thus, we are able to continue both exterior and interior renovations at all of our communities, with some safety adjustments due to COVID-19.

But coming back to April collections, the numbers seem to validate the thesis that high-quality renovated properties do better in times of distress. At communities where the majority of the amenities are completed and at least 50% of the units are renovated and rented at much higher rates, we are seeing more people pay. And more of those who pay are able to cover their entire rent. Meanwhile, at the less-repositioned properties, we are seeing more people unable to pay. And of those who do pay, many require a payment plan.

Conclusion

Well, as we consider the impact of COVID-19, it’s been manageable thus far. We have been successful at continuing to lease available units at all sites and to pre-lease units that are currently under renovation. Both are very encouraging signs.

Exterior and unit-interior renovation crews have been working, and there has been no loss of productivity to date (aside from some accommodations for safety due to the pandemic). 

All and all, while this has been and will continue to be a challenging time, thus far, COVID-19 has not been a calamity for us. But of course, what will happen in May is still unknown.

As I survey asset classes, the premise seems to be proving out—apartments are seemingly one of the most stable investments during this pandemic. It’s one of many reasons why there is no place I’d rather be than large multifamily.

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Are your renters paying? How are you handling those who cannot pay at this time?

Join the discussion below.

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the
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    Dave Rav from Summerville, SC
    Replied 5 months ago
    I am in the same boat. Outperforming other stats I am seeing. 100% of tenants paid for April, with the usual few cases delinquent (who always are). Month of May (some of my rents are due the 25th) and I'm at about 50%.
    Sri Ram Rental Property Investor from West Palm Beach, FL
    Replied 5 months ago
    Why do you have rents due on the 25th? Any special reason or you charge the rents and keep it the same date they moved in instead of prorating it to the first of month rent payment in the next month after they move in.
    Vitaliy Volpov Attorney from Albany, NY
    Replied 5 months ago
    Great insight as always, Ben. What are your thoughts on the future of rental real estate ownership in light of our esteemed Washington D.C. lawmakers proposing complete mortgage and rent forgiveness while the country is under the state of emergency (and possibly longer)? https://omar.house.gov/sites/omar.house.gov/files/Omar%20-%20Rent%20%26%20Mortgage%20Cancellation%20Act%20-One%20Pager%20and%20Legislative%20Framework.pdf. I got a little flashback to the old days of our Soviet motherland. And, I can't say that it made me feel all warm and fuzzy inside. Vitaliy
    Vitaliy Volpov Attorney from Albany, NY
    Replied 5 months ago
    Here's a clickable link to an article on the proposal, since the PDF link in my comment above does not appear to be clickable: https://reason.com/2020/04/20/ilhan-omars-bill-would-enable-the-feds-to-seize-landlords-properties-for-trying-to-collect-rent-during-coronavirus/
    Lawrence Maiolo
    Replied 5 months ago
    I can tell that none of you guys live in Massachusetts. Tenants, not all, will take full advantage of this to go months without paying their rents and there is nothing a landlord can do to stop it.
    Kris Wong Rental Property Investor from Austin, TX
    Replied 5 months ago
    "But coming back to April collections, the numbers seem to validate the thesis that high-quality renovated properties do better in times of distress." -- Not all distress is created equal. While I would agree that a higher quality of tenant typically has more stability, when looking at this in the aggregate, this particular situation is clearly impacting hourly/lower paid workers more than office workers. The businesses hurt most are the retail stores, the restaurants, and these sorts of service oriented operations. Office workers are generally just working from home. I consider this to be a very different scenario than your "typical" recession, i.e., 1999 & 2008. In those cases, you're more likely to see across the board reductions in labor costs. In those cases, you're likely to see more people at the higher end looking for a cheaper place to live. This is often referred to the the waterfall effect.
    Barbara Willson
    Replied 5 months ago
    I agree with your article Ben. I also invest in higher rental units, well more like medium priced units in great locations, just not low-end. I have found that young professionals and graduate students make the best tenants as they are very concerned about growing their credit scores and getting ahead in life so I've never received a bad check or non payment of rent from them, even during the pandemic.
    Susan Maneck Investor from Jackson, Mississippi
    Replied 5 months ago
    I got a partial payment from one of my tenants just last week which means they will be late next month as well, but most have paid. I think all of them would have paid had they gotten their enhanced unemployment checks which seem to be taking forever. I won my tenants goodwill by buying cheap chromebooks for their kids so they could keep up with their school work. What I'm worried about is what happens in August when their enhanced unemployment runs out?
    Gino Puopolo
    Replied 5 months ago
    Hi Ben, Great article thank you. I think you have as good chance as anyone with collecting your rents in a time like this if you establish healthy relationships with your tenants before the storm. Our tenants are going to be our future landlords, teachers and parents. If we treat them with respect in that way , in return they will pay you the rent they have agreed too, even in Boston MA ....
    Sonja Sevcik
    Replied 5 months ago
    This is true. I spent most of my rental income last year fixing units and budgeting for a strong spends this year on newer appliances, etc. (i.e. things I can do with the tenants in the unit). So far April and May look good. I'm keep my fingers crossed because this is going to be a long hard year .... But this thesis should result in more income stability and a return to improving income faster than other real estate asset classes and or lower end rentals. Fingers crossed! Other factors like location, culture of community, and government regulation will be key too. Oh man!
    Tina Huffman from Napa, CA
    Replied 5 months ago
    Yes I'm feeling much more confident in my "Ben and Sam" MF investments than the two non MF real estate syndications I'm in. I agree about quality. I specifically bought only 3/2 rental homes in decent school districts specifically because I believed they would attract a much more stable long-term quality tenant than C class or war zone units that appear to cash flow more. So far, so good - they're paying and one just asked to renew. Keeping my fingers crossed though and I don't take anything for granted.
    Paul Wosachlo from Longmont, CO
    Replied 5 months ago
    Great article Ben, I agree. I strive to provide a quality property at an attractive value proposition for tenants. Only have 1 tenant in a 7-unit in Phoenix in a low income area that still hasn't paid April, but that isn't uncommon under normal times. I've had other "problem" tenants pay on-time or even in advance the last few months.
    Anastasia Sergeyeva Rental Property Investor from Cincinnati, OH
    Replied 5 months ago
    We do not have this problem at all here in Cincinnati, Ohio - 24 units - first of all 70% of units are section 8 tenants ( and you always get paid on time), we have 7 cash units - just 1 tenant was late and paid rent in full by April 15.. May 2 - 90% rents are paid.. I really believe in Brandon & Heather Turner rules ( read The Book Of Managing Rental Properties) - "train your tenants" - I give them move in instruction clearly explain "if you dont pay by 6th - eviction will start on 10th.. " and 1 friendly text on 1st of the month -rent is due today.. I think that Choosing state where you do business is very important - we moved from Los Angeles 2 years ago & I can not be happier..
    Olga Vision
    Replied 5 months ago
    The one tenant who was already behind before the plague started is still behind. Others are all up to date. I offered discounts on early payments to the tenants who expressed concerns over job losses & ability to pay, & that has paid off in spades: tenants are happy & appreciative.
    Ryan Garrison Rental Property Investor from Olympia, WA
    Replied 5 months ago
    Mine are paying, but I think it is because they are in Lease Options and do not want to lose out on their Option to Buy.
    Johnny McKeon from Apache Junction, AZ
    Replied 5 months ago
    good article reaffirming the positives of Multi-family. I always enjoy reading your point of view, Ben