How Does the CARES Act Impact Landlords?
The world has changed shockingly fast in the last 10 weeks.
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Ten weeks ago, I was sunning on a beach in Brazil and sipping coconut water directly from the coconut. Today, I rarely leave my apartment and consider myself lucky to still be earning any income (reduced as it is).
During that short period, 36 million Americans have filed for unemployment, sending the unemployment rate soaring from near-record lows around 3.5% to a Great Depression-levels of 15% or higher.
The federal government has pushed a series of measures through in rapid succession to try and limit the losses as much as possible. But this rapidly evolving crisis has impacted real estate investors and landlords in unexpected ways and left many unsure about ever-changing rules.
And if there’s one new set of rules that landlords need to understand, it’s the CARES Act.
The CARES Act Eviction Moratorium
The Coronavirus Aid, Relief, and Economic Security Act—cutely monikered with the acronym CARES, as Congress so loves to do—included sweeping measures that impacted nearly every single American. But one section proved particularly relevant to landlords.
The CARES Act suspended evictions for 120 days, from March 27 through July 24, 2020, for a wide range of properties. Those properties include:
- Properties with Conforming Loans: All properties secured by a mortgage owned or securitized by the federal government, particularly Fannie Mae and Freddie Mac.
- Properties with Federally Insured or Guaranteed Loans: All properties secured by FHA, VA, or USDA loans.
- Rentals with Section 8 & Housing Choice Voucher Tenants: All properties with tenants paying with vouchers. That includes public housing projects.
- Properties Using LIHTC: All properties where the owner takes the Low Income Housing Tax Credit when filing their tax return.
That, of course, leaves many other rental properties unaffected. The two loan-based inclusions, for example, apply to mortgage loans designed for homeowners, not landlords. Even if landlords sometimes use them for house hacking or other savvy financing tactics.
Still, it does suspend evictions at millions of rental properties across the country. Note that the act prohibits landlords from even beginning the process by serving an eviction notice to cure or vacate. The suspension applies across the board, not just for nonpayment of rent, so landlords can't non-renew leases or evict for other lease violations such as criminal activity or abusing their properties. The act also stipulates that after the suspension ends, landlords must provide tenants at least 30 days’ written notice before requiring them to vacate.
And the CARES Act marks only one of several potential eviction restrictions on landlords right now.
Eviction Roadblocks Beyond the CARES Act
Even if none of the CARES Act property stipulations apply to you, you still may not be able to evict tenants violating your lease.
Many states, counties, and cities have declared local eviction moratoriums, preventing any evictions for any reason within their jurisdictions. Some come with explicit timelines, others left the suspension open-ended.
Nor do landlords' enforcement challenges end with express moratoriums. Even in many landlord-friendlier jurisdictions, civil courts remain closed. Landlords can't complete the eviction process without a rent court hearing, which leaves them with no practical way to remove tenants in violation of their lease contract.
It’s not easy to fill vacant rental units during the pandemic. I know—I’ve been trying to do it.
But I’ve also been even pickier than usual right now. If I can’t enforce a lease contract, then I’m effectively signing a lease based on the renter’s character and my belief that they will honor the agreement.
Not that it comes down to character alone. Many unemployed tenants simply can’t afford to make rent payments right now.
So, you also need to scrutinize the applicants' jobs, under the cold light of the pandemic. How likely is it that they'll be able to continue working? Because not all careers are getting hit evenly by the coronavirus-induced recession. Nurses have far greater job security than, say, bartenders right now.
I’d rather leave my property vacant than rent it to someone who will damage and wear the property without paying rents, who I can’t evict for the foreseeable future. And make no mistake: you can’t assume that the initial timelines, such as the CARES Act 120 days, will be the end of it.
My city has extended its lockdown timeline three times now—which goes to show that the future is more uncertain than I can ever remember, at least when it comes to rules of commerce.
The CARES Act could very well be extended another 120 days. Local eviction suspensions could extend even farther into the future. And it’s anyone’s guess when courts will reopen in any given jurisdiction.
In its original form, the CARES Act stipulates that tenants are still liable for all rent payments, even if landlords can’t legally enforce that liability right now. But what unemployed renter can come up with four months’ back rent payments all at once?
They can’t, and the longer our economy remains closed, the clearer it will be that tenants simply won’t be able to catch up on back rent. This leaves lawmakers with three choices: allow mass evictions, stiff landlords for those back rent payments, or step in and pay tenant’s rents—with a series of ugly strings attached for the landlord but not the tenant.
Look no further than the several disturbing bills proposed by fringe-left members of Congress. Bills like the Emergency Rent and Mortgage Cancellation Legislation and the Take Responsibility for Workers and Families Act.
This legal uncertainty, even more than the soaring unemployment rate and recession fears, is why the pandemic is changing my real estate investing plans.
The Growing Eviction Backlog
Don’t get me wrong, I too worry about the building backlog of evictions waiting to happen. With much of the world’s economy simply closed down, people can’t earn money, can’t pay their rent, and certainly can’t spend money to bolster other people’s jobs. Fully one in four renters is struggling to pay their rent right now, and frankly, I expect that number to get worse before it gets better.
When eviction bans lift, brace yourself for a wave of evictions. Any landlord who’s been through the process knows how miserable it is for everyone involved. It’s expensive, time-consuming, emotionally draining, and it usually ends with rents that will never be collected and damage to your rental property.
And a backlog means a much longer process than usual. I’m accustomed to a backlog of evictions in Baltimore City, where it can take months just to get a court hearing scheduled, much less an actual put-out date. The rest of the country should prepare for a similar experience.
No Foreclosure Relief for Landlords
Tenants are getting eviction relief at the moment. But landlords aren't getting foreclosure relief.
Yes, the CARES Act suspends foreclosures at those properties included under the bill. But most landlords use other forms of financing, such as portfolio loans, commercial loans, or private loans to fund their properties.
So rents stop coming in, but mortgage payments need to keep going out.
Not that mortgage payments even represent the bulk of landlords' expenses. Landlords must still pay for repairs, maintenance, property management fees, property taxes, landlord insurance, travel and accounting expenses, and a dozen smaller costs.
Speaking of insurance, some landlords are finding help from their insurance policies. Rent default insurance policies are paying out (even though most have stopped issuing new policies). And even standard rental property insurance sometimes includes "business interruption" or "business income" protection. Landlords should review their policies carefully and discuss with their insurance agent.
While real estate has historically beaten stocks handily in recessions, this time investors face not just threats from the market and economy but also threats from legislation and the legal environment.
Until the legal environment becomes clearer, I’m extremely cautious about buying new rental properties. It’s a politically dangerous time to be a landlord, and what lawmakers fail to grasp about vilifying landlords is that investors won’t put money in rental housing if they don’t have protections under the law.
I love real estate as an asset class. But landlords should be careful they don’t find themselves an unwilling subsidizer of other people’s housing.
Are you still buying rental properties right now? What precautions are you taking as an investor?
Join the discussion in the comments below.