Covid-19. What to do if your tenant can’t pay rent.
The Coronavirus has affected us all to some degree or another. Some worse than others unfortunately, but everyone has their own struggles and challenges to deal with.
Many landlords are waking up to emails from their property managers informing them that their tenants have lost their jobs and will struggle to pay rent. This is understandable given that renters make up 32% of the population and 1.7 million Australians are expected to be jobless by November 2020.
The prospect of not receiving rent for months can be devastating for you as a landlord as you likely have a mortgage to pay. Other landlords rely on rental income to pay their bills and support their lifestyle so losing this income stream can be as crippling as losing a job.
Unfortunately, many people are using the current situation to avoid paying rent even if they haven’t lost their jobs. It is understandable that people are financially nervous, but those who can still afford rent and try to lie about their situation are only disadvantaging people who genuinely need assistance.
There are certain things you can do to protect yourself and ensure that your tenants are being truthful when they say they are not able to make rental repayments:
Mark Ribarsky, director of Property Manager Melb featured on ‘The Feed’ (SBS) on the 20/04/2020 discussing tenants and the corona virus.
4 Things You Can Do To Protect Yourself From Losing Rent
If you don’t already have landlord insurance, you should definitely organise it and make sure it covers at least four months of lost rent. We advise all our landlords to have landlord insurance at all times, and it is in situations like these where you’ll be glad you have it.
If tenant cannot pay rent or simply refuses to, insurance can cover your lost rent and ensure that you receive everything you are owed.
Instead of thinking of landlord insurance as another expense, think of it as securing your investment. You can cover yourself for as little as $80 a month, which is much less than losing thousands of dollars of lost rent if your tenant cannot pay.
Defer your mortgage
Most banks are allowing their customers to defer their mortgage payments for up to 6 months. Even if your tenant is making regular rent payments, it may be worth deferring your mortgage for a few months just in case your tenant loses their job down the track. This gives you some cash-flow security in the event that you don’t receive rent for a while.
The other thing to be aware of is that the bank will take the interest you do not pay in this deferral period and add it to the balance of your loan. It’s a zero-sum game at the end of the day, and you won’t receive any discounts or interest-free periods.
All you are doing is stopping your repayments for a few months and allowing the worst of the coronavirus pandemic to pass. Once things begin to return the normal, you can unfreeze your mortgage and return to regular repayments.
Ask your tenant for proof
If your tenant claims to have lost their job, you should ask for proof, and it is within your rights to do so.
A good property manager will ask for a letter from the tenant’s employer stating that they have been let go or that their hours have been reduced. You should also request a bank statement which proves that their regular income has been disrupted. You should be able to see their salary paid regularly in past months, and then an abrupt stop or reduction if they have lost their job.
Property managers request bank statements from potential tenants during the leasing process to verify that they are getting paid what they claim they are, so this is nothing out of the ordinary.
‘Trust but verify.’ Ronald Reagan.
Find a solution
Here are a few suggestions for finding a solution that suits both the tenant and the landlord:
One of the most common solutions that many landlords are favouring is to offer your tenant a period of zero-rental repayments, to be paid back at a later date. This could mean that your tenant does not pay rent for three months, and then pays this back at a future date, once they have restored their regular income. This strategy relies on freezing your mortgage for a time, so you don’t have to find other means to make the monthly repayments. You can keep making repayments if you can afford it of course.
For the landlord, this is the best financial compromise as you will receive all the money you are owed eventually. Just make sure you have the agreement in writing.
Many tenants will not jump at the idea of putting themselves in debt in this tumultuous time so they will likely ask for a reduction in rent. This is not what a landlord wants to hear, but some people will genuinely struggle to pay back this rent even if they find a stable job down the track.
Given you can freeze your mortgage, then offering the tenant a rental reduction for a period of three to six months is not the worst thing in the world. If you have a good tenant, it is in your best interests to help them out so that they don’t leave, and you are forced to find a new tenant in this tough market.
Many landlords with long-term renters in their properties favour this strategy and offer them a reduced rent for a certain period as a thank you for being good tenants and paying their rent on time.
It’s important to remember that these are extraordinary times and being sympathetic to other people’s struggles will go a long way to building respect between you.
Evict if necessary
Although we do not recommend evicting a tenant unless absolutely necessary, sometimes it is necessary. If your tenant is not paying rent, providing fraudulent information about their job situation and blatantly lying, you can evict them as per usual.
The prime minister has indicated that no one will be able to be evicted for six months, but this has not actually been passed into law and all current laws still apply. Consumer Affairs has informed us that evicting tenants for genuine reasons, including inability to pay rent, is still legal and within your rights as a landlord.
That being said, you should still expend all possible avenues in finding a compromise. This is a difficult time for everyone and not the time to be unnecessarily harsh. Reducing the rent for a few months is not a huge deal in the grand scheme of things, and if you protect yourself as outlined above, you shouldn’t be affected by a few months of zero rent.
If your tenant is not cooperating at all, then evicting them may be your only option. Keep in mind that leasing property in the current market is tricky and there is a good chance that your property will sit empty for longer than usual. You will also have to reduce your rent to remain competitive in this flooded rental market, so you might actually end up worse off if you choose to evict your tenants.
Whatever you decide to do, remember to be sympathetic and do everything you can to aid your tenants. It is better to receive less rent for a few months and keep good tenants in your property rather than having your property vacant for weeks or months while you search for new tenants, most of whom will be looking for cheaper rental properties anyway.
If you are proactive and take all the necessary protective measures, you won’t be affected too badly, and you will come out the other side of this pandemic in good financial condition.