In this episode, Theo shares 11 tips for collecting rent from your tenants during the coronavirus pandemic. These ideas and tips are from research around the real estate investment community, from some of our previous guests, and from the Best Ever FaceBook community.
To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
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“During this pandemic, one idea is to apply your tenant’s security deposit towards rent and apply a discount to help your tenant’s out.” – Theo Hicks
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hello, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s apartment syndications. As always, I’m your host, Theo Hicks. Each week, we air to podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes we’ve been releasing free documents as well; how-to PDF guides, PowerPoint presentation templates, Excel calculator templates, things that will help you along your apartment syndication journey. All of these free documents and past Syndication School series episodes can be found at syndicationschool.com. Today, we will be continuing with our coronavirus-focused episodes and talking about how to collect rent. So some tips on collecting rent.
When this episode airs, the first of the month of 1st of April will have arrived, and in previous months, apartments syndicators really knew that the vast majority of the residents were going to submit their rent on time and in full, something that we didn’t really have to think about at all, unless we were just buying a property and knew that tenants weren’t the best and the plans have turned them over. But the majority of the time, they’re going to pay on time; that’s not really something that was focused on. Whereas now with the coronavirus pandemic, a lot of people losing their only source of income, being furloughed indefinitely, laid off from their job, hours cut back, it’s the first time that rent is due during this pandemic time. So we wanted to provide some tips on how to collect rent.
So they did pass the $2 trillion Stimulus Bill, which is going to extend a direct cash payment to certain individuals if you qualify. So it’s $1,200 bucks for most American adults and $400 or $500 bucks for each child, as well as some money for businesses, cities, states and small businesses, hospitals, things like that. So that is obviously one option. If your residents are able to get that direct payment, then that can help them cover rent for a month or two. But besides that, I wanted to provide some other tips on how to collect rent that’s not the direct cash payment that’s coming from this stimulus bill.
In this episode, we’re gonna focus on 11 ways that you can still collect rent during the coronavirus pandemic. This comes from research that we did across the Internet and things that other investors are doing, plan on doing. So that’s where this information came from.
So the first piece of advice came from our Best Ever show community on Facebook, which I highly recommend following or liking if you aren’t already, because we’re posting some coronavirus related content every day and we are asking for people that are currently following the page to provide their input on things that they’re doing. So a lot of active investors are providing some very solid advice, and these first three approaches are coming directly from that group.
So the first came from Justin, and this one’s pretty simple. He’s just going to offer a small discount to residents who pay their full rent early or on time. So if they pay their rent a week early, a few days early, and it’s in full, then he’s going to give them a minor discount. So obviously, the discounts and the timing of how early, it is up to you, but the goal is to motivate residents to pay their rent before it’s even due; so pay it early. That way you have an understanding of how much you’re going to be collecting for that month and in return, you’re giving them a small discount. So that was number one.
Secondly, Justin’s also going to set up a repayment plan for residents who cannot pay their full rent on time or pay their full rent early. This is going to allow residents to make up for their unpaid rent later. So that’s another strategy that I’ll talk about later in this episode about a potential repayment plan, but if they don’t pay rent, then you create some plan for them to repay it in the future before their lease expires. So just helping people out that aren’t able to come up with rent. Justin is offering a small discount if they pay early, and also creating a prepayment plan rather than evicting them, or you’re charging them money with interest or something. So those are the first two strategies.
The next strategy comes from Julie, also from the Best Ever show community. It’s a very unique approach to collecting rent. I believe I talked about this on last week’s Syndication School, but first thing she’s doing is allowing her residents to apply their security deposit towards a reduced monthly rent payment. For example, if you have a resident who owes $1,000 per month in rent and has a $1,000 security deposit, well, what Julie did is she allowed them to use that security deposit to cover two months’ rent. So she discounted their rent each month for two months by 50%, so $500 each month, and they were able to apply that $1,000 security deposit to their rent. So at the end of the lease, they won’t get that $1,000 back, because the $1,000 should be sitting in a bank account somewhere. So you just take money from the security deposit bank account, and deposit that into your rent collection account.
Now in return for this discounted rent and with the ability to apply the security deposit to the monthly rent, Julie was making the residents sign a new lease. So six months or twelve months depending on what their current lease is, as well as sign up for some security deposit insurance. So the service she uses is called Rhino, and it’s $10 per month per $1,000 in the security deposit insurance, and then depending on the residents, she wants to see two to three times, the security deposit amount in coverage. So if they owe $1,000 for security deposit, then they’ll pay $20 to $30 per month for security deposit insurance, and security deposit insurance covers damages and unpaid rent. So if they can’t continue to pay rent, well then Julie can make up for that by having that security deposit insurance and collecting rent that way.
So she had just started this during the coronavirus pandemic and hasn’t actually filed a claim yet so you’ll want to check out Rhino or some other security deposit insurance company. The strategy here is to allow your residents to use their security deposit to pay their rent. Julie did a reduced rate just because she wanted to cover two months as opposed to one month, so pushing the problem away two months as opposed to one month. So you can reduce it by 33%, or you don’t have to reduce it at all. You can make them sign a new lease or not sign a new lease. You can make them sign up for security deposit insurance, you can make them do something else, but the overall strategy is to have them use their security deposit to pay rent in return for doing something else that you want them to do. So that is strategy number three.
The next two strategies, four and five, they came from actually a Best Real Estate Investing Advice Ever Show podcast interview that I did with Daniel, which actually aired this past weekend. So I think it aired the 29th or the 28th of March, and the first tip that he provided is to communicate with all of your residents to understand their ability to pay rent in full and on time. So you don’t want to skip this step. You don’t want to just not say anything to your residents in general. Obviously, you want to communicate them with the safety precautions that need to be taken by them and that you are taking during this time, but you also want to communicate with them about their ability to pay rent, because not every single resident is going to have a problem paying rents.
So you don’t want to assume that every single person at your apartment community is not going to pay rent, and then apply whatever solution to everyone. So if you’re gonna do Julie’s solution, for example, and allow them do their security deposit and reduce the rent by 50%, you don’t want to do that to every single person. You only want to implement some solution for residents who will have a problem paying their rent. For the ones that don’t have a problem paying their rent, you don’t really need to do anything. If they’ve kept their job, if they already work remotely or work for an industry that’s not affected by the coronavirus, then nothing really changes for them. It’s for the people who cannot pay rent on time. If you don’t communicate with the residents, you’re not going to know, and you might end up losing more income that way.
So, Daniel, he had a long-term rental portfolio and he has a short-term rental portfolio, so all of his long-term residents are able to pay rent on time. So since he’s a sales manager, he had the conversation with his residents or he knew from past conversations with residents, whether or not they were financially impacted by the coronavirus. And fortunately for him and his residents, none of them were financially impacted by the coronavirus. They all had their jobs and were still getting paid, and so they were all able to pay rent on time.
Obviously, his short-term rental portfolio was a different story, and that’s something that I’ll talk about in the next tip, but if he didn’t communicate with residents or if he wasn’t a sales manager and didn’t know that all of his long-term residents could pay on time, well, first of all, he might have been surprised come April 1st, but secondly, he might have applied the solution that resulted him losing income that he didn’t necessarily need to lose, because some of his residents might have been able to pay him on time. So this is a very important step, very important tip, which is to make sure you understand where your residents are at financially before implementing or offering some discounted rate to them.
So, Daniel’s other tip was very interesting. So as I mentioned, half of his portfolio consisted of long-term rentals, so 12-month leases, which as I mentioned before, he didn’t expect to be impacted by the coronavirus. Obviously, it’s still really early, but at the time of the interview, he knew that the residents were gonna be able to pay their rent on time.
The other half his portfolio were Airbnb rentals. So obviously, with all the stay-at-home orders, most people aren’t traveling and staying in short-term rentals anymore. I did interview someone in North Carolina, I believe, who said that the little municipalities he said he’s in actually started to ban any lease that was less than 90 days. So short-term rentals are completely shut down in his local area. So for Daniel in particular, since all of his short-term rental clients canceled the leases, he pivoted and is trying to market his properties to traveling nurses, because all of his properties that he uses for short-term rentals are really close to hospitals. But he’s not able to do that for every single property. Some of these properties are still vacant.
So what he said, and what I thought was really interesting, was that he plans on volunteering up his units to volunteers that are coming to the hospital. So people that work for Red Cross or other professionals that are traveling to the hospital to volunteer and help with the coronavirus. Something he said that was very interesting was that the worst-case scenario is that you would help someone else. So for him, he’d much rather have someone living in his unit and being able to use it to do good than just have it sit there vacant, because he’s gonna lose money regardless. So in his mind, he wanted to help people, rather than to have it to sit vacant. So I thought that was a really interesting, altruistic strategy. So another tip you can use, not necessarily to collect rent, but a way to give back and help people during this crisis.
These next tips come from Brandon Turner over at BiggerPockets. He created a YouTube video with the strategy that he is going to implement for collecting rent during the coronavirus pandemic. He had a five-step plan or five tips, and I really liked three of them. So the first one was to keep an eye out for federal and local programs that will be created to help residents pay their rent. So a perfect example would be the direct cash payments to qualifying individuals in the $2 trillion Stimulus Bill that passed March 27th.
So research online and figure out what other programs there are available. I’ll talk about another program on the Syndication School episode tomorrow or directly after this one, and that was included in the $2 trillion Stimulus Bill. So that was number one, or Brandon Turner’s first tip, which was number seven overall.
Another idea that he had, so eight overall, is to have residents pay rent with their credit card, so very simple straightforward. It allows them to delay paying their rent in a sense, by a month or longer than that, as long as it makes the minimum payment on their credit card bill… And I believe Brandon said that he was going to waive the 3% credit card fee that is incurred when you use your credit card to pay rent on their portal. So you might have to set up a portal or do some extra steps to accept credit cards for rents, but Brandon waived the fee. You can or can’t do that, depending on what you want to do, but that’s another way to collect rent, is to have them use a credit card.
Then his third, which is number nine overall, is to offer his residents an emergency rent deferral program, which he said was a last resort and something that he only brings up if all the other options don’t work. So for his program, as I mentioned earlier in this episode, Justin also had a repayment plan, but he didn’t get into specifics. Brandon got into specifics of his repayment plan.
So what he does is he allows his residents to defer paying their rent for up to two months. And then, once that two months is over, or one month is over, they are able to pay the rent back over a 10-month period. So let’s say, for example, a resident misses their $1,000 a month of rent payment on April 1st and on May 1st. So there are $2,000 in the hole, they’re not allowed to miss it in June. So they must pay their rent in full in June, but they’re also going to owe 10-month installments for the $2,000 that they didn’t pay. So it’ll be $1,000 plus 200 bucks for a total of $1,200 per month, starting in June, and then ending after 10 months. So that’s the plan.
Actually, I think he delayed the 10-month repayment program by a month. So for example, if they’re gonna miss April and May, they wanted to pay 1,200 bucks until July. So they [unintelligible [00:16:13].17] at June, as long as they pay their $1,000 a month, they’re fine, and then starting in July, they’ll give him 1,200 bucks.
A few other tips that I came across – some of these are pretty simple, but one is just to offer free month of rent to residents, as long as they can provide you with a financial hardship letter from their employer, stating that they have been laid off or furloughed due to coronavirus, or a note from their doctors saying that they have coronavirus. So this really could be applied to all these.
So if you want to, you can only apply these types of things to people who can prove that they’ve been hit financially from the coronavirus. So a letter from their employer saying that “Yes, we’ve had to lay off employees because of this reason, and Billy Bob is one of them.” Or, “Yeah, his hours have been cut because of the coronavirus and his pay’s been reduced because of the coronavirus,” things like that. So again, that’s up to you. You can apply these solutions to all residents or you can apply them only to people who can prove that they’ve been hit financially by the coronavirus. It’s really up to you. These are all just strategies that we’re throwing out there. You can use them or not use them.
The other one is to reduce your rents to the point where you don’t make any money, but are still able to cover all of your expenses. So let’s say that you’ve got a 100-unit property and you find out that 30% of the residents have been laid off from their job and can’t pay rent. And then let’s say that the breakeven economic occupancy is 70%. Well, 30 units is 30% of the total units that are there. So if none of those units could pay rent, then you’re at 70% economic occupancy, assuming that all other 70 units are paying their full rent. So you could technically offer no rent to those people and still not lose money. So figure out what your break-even point is and then know that you’re able to reduce rents by that much, but no lower, in order to continue to cover all of your expenses.
So those are the 11-ish tips for how to collect rent or help out your residents during the coronavirus pandemic. To summarize, it was, one, offer a discounted rent to those who pay early or on time. Number two is offer a repayment plan. Number three is to allow residents to apply their security deposit to their rent. Number four is ask residents to pay for security deposit insurance. Number five is to communicate with residents to see who can and cannot pay rent. Six, is volunteer your units for free to coronavirus volunteers. Seven is to use federal or local programs created for landlords and renters. Eight is to ask residents to pay rent with a credit card. Nine is to offer an emergency repayment program. Ten is to provide free rent to residents who lost their job and 11 is to reduce rents to break even.
Now before we go, we did create a page on our website, where we post all of our coronavirus related content. It’s joefairless.com/coronavirus, it’s pretty simple. We update that every single day with blog posts and different articles. So if you’re interested in learning more tips on how to maintain your properties during the coronavirus pandemic, I recommend checking out that.
Also, check out our other syndication school episodes and those free documents. Those are available at syndicationschool.com. As always, thanks for listening, have a best ever day, and we will talk to you tomorrow.