Renters aren't the only ones in a tight position right now as the coronavirus pandemic wages on. A recent STOUT Institute study estimated that by January 2021, landlords would be owed more than $34.3 billion in back rent, meaning landlords, particularly small landlords in the single-family rental business, are feeling the pinch as eviction moratoriums continue to be extended.
Small landlords feel mounting pressure to sell
In March 2021, the Centers for Disease Control (CDC) extended the eviction moratorium until June 30, 2021, meaning tenants who can prove they have been adversely affected by COVID-19 and are unable to pay rent as a result cannot be evicted. An estimated 60% of single-family landlords have received the required paperwork outlined by the CDC.
The inability to evict in order to rent to tenants who can pay, coupled with higher vacancy rates in the rental market, as well as the requirement to maintain mortgage payments and ongoing expenses, is putting a lot of pressure on landlords to sell. A survey from Avail and Urban Institute conducted in October 2020 found that nearly 31% of the surveyed respondents felt financial pressure to sell their property, particularly among those who did not receive full rent the month prior.
There was also a significant increase in the pressure felt by landlords who carried a mortgage or earned a lower salary. Over 47% of landlords who earned $50,000 or less annually reported increased pressure to sell, versus just over 20% of landlords with income of $150,000 or more.
The STOUT Institute study also found that approximately 35% of smaller landlords are using savings to pay for expenses that are typically covered by rent income from tenants. This number is likely higher for landlords who rent to middle- or lower-income tenants, workers who have been disproportionately affected by the pandemic. Each time the eviction moratoriums are extended, landlords have to dip further into their savings to maintain the property or risk becoming delinquent on their financial obligations, including insurance, property taxes, or a mortgage.
Is now the time to sell?
There is a silver lining, however, for struggling landlords. The residential market is the hottest it's been in nearly a decade, meaning property owners may be able to sell for top dollar. The challenge will be finding the right buyer.
Residential housing is selling mostly to homebuyers right now, and with tenant and eviction moratoriums in place, the new buyer won't be able to move into the property or rent it, leaving them with the same problem as the previous landlord. This may cause landlords to have to lower the price of the property to account for the risk associated with owning a nonpaying rental property in today's market.
Investors should consider the long-term outcome of the moratoriums. There's a good chance that moratoriums or other protections are enacted even after the current expiration date, which means it may be longer than anticipated before there can be a resolution and relief for landlords. There's also the possibility of the moratoria expiring but the property being left vacant because of a lack of eligible renters in the market. With millions of Americans unable to pay rent right now, landlords are in the position to potentially face new pressure: record-high vacancy rates after a flood of evictions.
The Millionacres bottom line
There are patient investors with the capital and ability to wait out the current moratoriums, but these investors will almost certainly expect a discount when they buy. This means investors should only sell right now if they absolutely have to. Considering the fact that you only make or lose money when you sell, a down market means the chances of losing money when you sell is higher. If you have the ability to wait until moratoriums expire, you may not have to lose at all.