What Landlords Need to Know About the CARES Act

Written by Ben Mizes

May 19, 2020

The COVID-19 pandemic has brought the global economy to an abrupt stop; the stock market is down, oil prices have bottomed out, and tens of millions of Americans became unemployed almost overnight. Many of the jobless are having trouble paying rent, with tenants in some cities even calling for a rent holiday.

The federal government has given tenants a little help. The recently-passed CARES Act included an eviction moratorium for properties with federally-backed mortgages. (Tenants renting in properties without federally-backed mortgages aren’t covered by the act, though many cities and states have their own eviction moratoriums in place.) But there’s been very limited help offered to landlords, many of whom depend on a steady flow of rent to pay their own mortgages. However, they do have some options—though they might have to get creative in how they apply for them.

Let’s briefly cover why tenants are having trouble paying rent, how many tenants we can expect to fall behind on their rent, and what relief options are available to landlords.

Tenants Were Struggling Even Before the Pandemic

A recent study by Clever Real Estate examining the effects of the pandemic looked at the spending and saving habits of renters, and uncovered some interesting—and mildly disturbing—facts.

The large majority of renters haven’t been saving nearly enough money to carry them through unforeseen adversity. Financial experts suggest having at least three months of your normal expenses put away as savings; data from the Bureau of Labor Statistics shows that the average renter spends about $3,650 a month, which means they should have at least $11,000 saved in case of an emergency.

In reality, only 13% of renters have $10,000 or more saved up. Worse yet, 46% of renters had less than $500 in savings, and 49% overall had already burned through their entire savings. And as many cities prepare to enter their third month of lockdown, consider that 70% of tenants said they couldn’t survive more than two months on savings alone.

This lack of cash on hand is already making itself felt. According to the Clever survey, only 73% of renters paid their rent on time in April. The other 27%? Only 11% have made arrangements with their landlord to pay later; 13% simply didn’t pay rent, and 3% had already moved out of their units. Data from the National Landlord Association backs that up- in a Q1 report they also found that 70% of landlords reported rent had been paid on-time so far in 2020.

Data from other sources show the same trends and suggest that things may even be worse. Numbers from Apartment List, Avail, and the National Multifamily Housing Council indicates that 25-31% of tenants may have been unable to pay rent. As high as those numbers are, the scary part is that as more renters exhaust their very limited savings, those numbers could get a lot worse.

Relief Should Be Coming—But for Who?

Tenants around the country have been calling for a rent freeze or a rent holiday. In New York City, one of the hotspots of the pandemic, many tenants decided to withhold May rent to force the government to intercede on their behalf, by offering some kind of universal relief to both tenants and landlords. In Denver, the city council called on the governor to institute a full rent freeze. It’s unclear if these actions will produce results; New York’s governor has consistently refused to consider the idea, and the Colorado governor claims he doesn’t even have the necessary legal authority to put a rent freeze in place.

So where does that leave landlords? Stuck between mortgage and employee obligations, and a rent stream that’s already begun to dry up. Your lease agreement will not hold up against rent freezes that are mandated by the state. 

Landlords do have some limited options, though. Fannie Mae and Freddie Mac now allow holders of federally-backed loans to stop paying their loans for up to a year, with no fees or interest. The only condition is that these landlords can’t evict their tenants, and must allow them to pay their back rent over a term up to a year.

In the meantime, landlords could apply for an SBA Economic Injury Disaster Loan, a program that was recently enhanced in the CARES Act. The program offers loans of up to $2 million, with interest rates of up to 3.75%, for up to 30 years. On top of that, applicants can get an instant $10,000 advance just for applying—and that advance doesn’t need to be paid back. It’s not much, but for landlords who’ve burned through their cash reserves, it can help stave off bankruptcy.

An indirect way that landlords can get relief is to help their commercial tenants apply for a Paycheck Protection Program loan. Since these loans can be used to pay rent, landlords would benefit immediately if their tenant won a loan. And if the landlords have employees themselves, they might even be eligible for their own PPP loan.

And finally, another indirect relief option for landlords is through a potential tax refund. The CARES Act made a retroactive amendment to the bonus depreciation rules, which was changed to allow taxpayers to claim 100% bonus depreciation for “qualified improvement property.” Owners who originally qualified for 50% depreciation could now be eligible for double that, meaning they could receive potentially sizable tax refunds for 2018 expenditures. Just keep in mind that depreciation can’t be used on the rental properties themselves, but can be used on improvements to those properties. So if you replaced the roof of your rental property, or spent $15,000 on landscaping, you can now claim that entire expense. 

Landlords May Want to Consider Selling

With non-payment of rent and vacancy rates set to skyrocket, many landlords may face some tough choices. If they run the numbers and the profits just aren’t there, we could see a wave of rental properties hitting the market. 

Whether or not selling right now is a good idea depends on a lot of factors—some of them fundamental, and some of them specific to the pandemic. With the market essentially in hibernation, both supply and demand are in short supply. But there is demand; the Clever survey found that some buyers are aggressively looking for properties, but are expecting a big price cut. Owners willing to give them a discount—especially if those owners believe things are going to get a lot worse—might want to explore a quick sale.

There are other big picture factors to consider, too. The pandemic has already caused a migration out of cities and into the suburbs, as many families flee the density that enabled many urban outbreaks. Landlords who own properties in the urban core—especially luxury properties, which have already seen rents drop as more inventory comes online—might want to consider selling before prices drop. On the other hand, landlords with suburban properties might regret it if they get out now; those properties could be primed for a significant increase in value.

The bottom line is this: landlords are going to have to make things up as they go, just like society is. But if they make informed decisions, they can come out of this whole. Times are tough now and might get tougher, but there’s a near-consensus among experts that things are going to turn around, probably sooner than most of us think.

1 Comment
  1. Avatar

    My name jackie lee Torres I’m try to get help for my rent due to unemployment,pediemic, hurricane,,I’m getting evicted July 29 for 50$ fifty dollars that I can the next day . I’ve been doing my study on where the mentor ship is coming from I had an idea what the landlord was up to ass soon as the lease agreement changed and all .for me the one that is having a hard time due to epademic and and love ones dieing…I can’t believe you all can’t offer any guidance for the ones that pay rent only in how to get rich and stay rich while people are in the time of need …

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