Steve Olson 0:03
Welcome to the Build-to-Rent Podcast. I'm Steve Olson, and I do these episodes with Sherida Zenger and Chase Leavitt of the Fourplex Investment Group.
Today we are going to talk about something that made the news a couple of weeks ago, I was relieved, everybody else was on pins and needles. And I think if you're a landlord, or property owner, you probably were relieved. Here's a headline from NPR that we're going to talk about today, "the Supreme Court will allow evictions to resume it could affect millions of tenants"
Here on the Build-to-Rent Podcast we're exploring that rapidly increasing industry. There's a massive shortage of units across the country--builders have not been keeping up. People are jumping into this space to try to fill that void and create affordable multifamily inventory for renters.
So when we talk about this situation with the CDC, and the supreme court, at the risk of offending listeners, I think Well, yeah, duh. That's the last thing that's going to make this renting situation better... is by clamping down on landlords.
In fact, I saw a funny post on Twitter, an actor from Hollywood was angry. They were attempting to enroll their their child into college, USC in Southern California. And a couple of these landlords were asking for six months of prepaid rent in order to sign up for these apartments and the actor was taking to Twitter to complain about this. It was really mad, how can you charge that? First of all, they can afford it.
Okay, but that's another thing we can argue about later. And a lot of people jumped all over this guy and said, Well, what do you expect, when landlords have no idea if or when they could evict somebody that doesn't pay? They're gonna want the money up front. Right? You make it basically a drug dealer. Right?
Got to pay the money up front or you don't get the product. And that's kind of what you've reduced it to, in this sort of a situation. So I think it's important that we unpack for a moment, the eviction moratoriums, because this has been confusing, because the moratoriums have been issued by so many different government bodies, have they not? Yeah, so they have they have, but basically, at the beginning here, in, you had a eviction moratorium. And it was all kind of done in sneaky, sneaky ways. The first one was Fannie Mae and Freddie Mac.
They said, If you hold a loan, a federal loan through Fannie Mae or Freddie Mac, you can't be foreclosed on, but you can't evict it was just a total free. So a tenant could stop paying. You're like, I gotta have my rent, but you can't do it. Fannie Mae and Freddie Mac implemented that. Then you had it implemented by a bunch of different states. You even had some counties and cities do it. This one that we're talking about has been by far the most controversial. And so you've seen these kind of drop off along the way certain states have said, Yeah, we're not.
We're not doing that anymore. Well, the CDC, the Centers for Disease Control said, You can't evict anybody in areas of high COVID-19 transmission. And everybody got mad and argued about what does that really mean? An area of high COVID 19 transmission. So you can't do this. And then everybody the national Apartment Association, all these people freaked out saying you're attacking property rights. And by the way, who are you?
You're the CDC, what do you have to do with property rights? And so I read in the article, basically, they went back to reading from the majority of opinion said that the CDC is ruling or moratorium said it relied on a decades old statute that authorizes it to implement measures like fumigation and pest extermination. So they're saying we, we have authority because of some things that have been done in the past about fumigation and public health and pest extermination.
But the majority said it strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts, if a federally imposed eviction moratorium is to continue, Congress must specifically authorize it. So what that what that ultimately means is that now Can a landlord evict somebody in a higher area of COVID trend? COVID-19 transmission, does it?
Sherida Zenger 5:02
Yes. There's also an article showing state level evictions and foreclosure moratoriums. Right now there are two eviction foreclosure states, five eviction foreclosures only, and then the rest of the states have expired eviction moratoriums
Then they're also offering relief, which I think was huge. They said they set $50 million aside to help for the next year to year and a half for back rents and rents going forward to help the renter. Which I think then helps the mom and pop type of owner.
They were really the ones that I think were getting hit hard with this, because most people were like, well, you still have to pay your mortgage. Yeah, but your tenant doesn't have to pay their rent. Well, how how does that work?
Steve Olson 5:58
Yeah, well, then a bunch of them mon pause. But but especially the big national property owners, they went out and got a bunch of those PPP loans, right to help flow through any, any period of difficulty, but didn't I mean, Chase, we soon found out that, you know, tenants not paying rent that that was a very much a localized thing, wasn't it?
Chase Leavitt 6:23
For Utah it was just a short period of time. The thing I think about with this subject here is you try to put yourself in other people's shoes, right? You have the you have the mom and pop or you have the investor that most likely has mortgage and they need to make their mortgage payments.
They're counting on that tenant or that renter to pay their monthly mortgage and so on. They don't, that really could put them in a bad spot and get them in trouble. But then you also want to sympathize or, or think about that tenant or the renter that might be put in a bad situation laid off fire sicknesses, we got a bunch of things going on. And you want to sympathize. They need that relief for that help as well.
But there's also that situation to where you got to be careful because you don't want that tenant, the renter. milking the system a little bit. I don't know if we want to get too far into this. But you don't want them milking the system and not just paying rent, when they're very, very capable.
Steve Olson 7:21
Well, and many of them tried to do that. Right. I remember our property management team telling us it first I think it was probably 5% of the rental portfolio would just say, Well, I don't have to pay my rent. And that was never the intent of any of the moratoriums, it was no if you were if you're sick, and you can't go to work, because you've got COVID, or you got laid off, because you're the front desk manager at the Marriott, which just tanked and had to lay you off, then, just like many government programs, its effects were different than its intent.
I want to read a paragraph from the story real quick, because this would be extremely frustrating, right? If you just built new inventory, Congress has approved nearly 50 billion to help people pay back rent and avoid eviction. But while in some states and counties that's been working well, in many others, the help hasn't reached the vast majority of renters who need it.
Because the way that works, Congress approves the 50 billion. It's sitting there and they allocate that to these different local governments and states who then have to implement it. I bet your jaws are gonna hit the floor that some of the states implemented that better than others. Are you super shocked? Yeah. Right. So what if you're a landlord, if you've got some tenants not paying rent? You know, the money is there from the federal government.
In fact, you're paying taxes so that the money is there, but your local governments incompetent and you can't get any of that rental assistance? That's absolutely infuriating. At that point, you're saying, well, then I want to kick these people out. I can't get any of the rental assistance that I know is there. And I mean, that would drive me nuts. I was helping a client before we got on the podcast this morning. He owns a fourplex in Texas, that we developed as a masterplan build for rent community that we did there. And he has two tenants that haven't paid rent in about six weeks. Right? And well, he's gonna be okay. He's understandably annoyed.
Oh, he's fine. He can carry the property for a while.. He's got reserves... working capital set aside, but these tenants haven't paid. So the property manager wisely has a system set up and they refer people over to the Texas Rental Assistance Program. But it's backed up.
They're not really cranking out rent fast, but they are doing it. So your property managers have to be acquainted with these these programs that allow for assistance because if somebody legitimately can't pay it, you want to dip into that 50 billion, but you got to distinguish between them and the professional tenant, right? That tenant that knows how long they can go without paying rent.
Sherida Zenger 10:05
I know our management company did a really good job at trying to get ahead of this as well. And letting people understand that, again, like you'd mentioned earlier, this isn't something that you just don't have to pay your rent, you do have to pay your rent. So they worked out plans with people to pay back some of their rent at a later date. But let them all know, hey, you're still on the hook for all of this rent through the end of your lease. This isn't forgiven debt, but have worked payment plans and stuff with those people.
That's helped getting out ahead of it, rather than just waiting a couple months and saying, Oh, I haven't received checks for three or four months, chatting with those people and seeing what the real issue is. So again, we don't have the professional. Yeah, versus the person that really does need the help.
Chase Leavitt 10:49
When you're looking at buying investment property, with what's come out, and what we're talking about today, having a good property manager that's going to do the background checks, the credit checks the rental history and understand, what this tenant looks like before they actually sign a contract for that investor or that property. I think that's huge.
Then also understanding the market that you're going into as well. And that's the word we've been talking about.
Sherida Zenger 11:18
Yeah. Is it landlord friendly?
Steve Olson 11:20
And how are they implementing. When we talk about affordable housing, Section 8... That's all about where you're where you're working out of right, the county and local municipality, because the money gets allocated federally, but it gets dispersed on the local level. And they're just some of them are good at it.
Some of them absolutely are not. We'll see how this goes with the rental assistance side of things. But, man, if you look at landlording, just the cold hard way. And this is hard, because these are people's lives, right? I've had times in my life where money's just not falling out of the sky. It's hard to make rent hard to make a mortgage. That's, that's tough for somebody.
I mean, that's a real person on the other end of this, but if we step out of that, we go okay, Bobby, Sue didn't pay rent, it's the fifth of the month, Bobby Sue has a problem pay up or get out. I mean, that's the black and white of it is insensitive as that sounds. The difference here wasn't Bobby Sue has a problem is we both have a problem. Right? The market just completely went went haywire.
That high level of empathy that property managers had, well, you can't pay your rent, what can you pay? Let's work with you. And I helped a client analyze a rent roll the other day where one of the units, rent dropped off the table, right wasn't coming in. And then all of a sudden, three months later, it was but it was a little higher, dug into it. What was that? Oh, it was an abatement. They said don't pay for these three months, we're going to catch you up over time.
This turned out to work really, really well. Especially in some of these markets, where there are jobs where a tenant said I lost my job, or my pay has been really cut. I need some time to land. Right? Because what were you going to do? Right? Where are you going to rent? Now? It turns out, it turns out that's in the market. So we operate in just a shortage of rental inventory. And I think it's because of COVID-19 people coming out of places where they don't want to be and going to places where they do want to be that migration pattern.
Chase Leavitt 13:28
I also think we hit that sweet spot too, with where the rents are, what attendants going to pay. I have noticed we try not to shoot to build something we could but we're not building a super nice a class building, where we need to ask 2000 3000 or more for rent per month. And we're not super low either.
We kind of fall right in between there. And so it's understanding the investment, your type of property that you're purchasing, and then what your tenants going to look like and what they need to pay per month and if they can make that payment.
Steve Olson 14:03
Absolutely. So we're gonna see how this continues to go. As we record this in September 2021. We're gonna find out is... the Supreme Court said "no, CDC, you cannot do that. You overstep your bounds. This would have to come from Congress."
So how does this Delta nonsense continue to go through the fall? Does it get bad enough that Congress, which has a thin majority on the democrat side, feels compelled to act and actually pass some kind of moratorium by Law, I think it would have to get pretty bad for them for them to do that. So now now at least we got some clarity on that the CDC can't tell you you can't evict people.
Whether you like it or not, at least now we know the rules.