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Realities and Risks of Being a Landlord

In a recent column on ways to share an unneeded stimulus check, I suggested you could consider giving it to someone struggling to pay their rent. Initially, I added, “Doing so will benefit both the renter and the landlord.” Upon my final review of the article, I deleted that sentence.

Why? I was concerned that some readers might flinch at the very thought of helping out a landlord. In my experience, many Americans believe money scripts that landlords are wealthy, powerful oppressors. Just think of the villainous stereotype from old melodramas: “I can’t pay the rent!” “You must pay the rent!”

This belief comes from an incomplete understanding of what it means to own rental property. The very word “landlord” implies wealth, authority, and status. As with many other assumptions, the beliefs people project onto the word are often very different from reality. While being a landlord can be a path to wealth, authority, and status, it can and often does involve financial struggle, loss, and powerlessness.

It might be surprising to learn that “mom and pop” investors, with an average of two properties each, own almost half of all the residential rental units in the U.S. Some interesting research is summarized in an article on the HUD website by Todd M. Richardson, Acting General Deputy Assistant Secretary for Policy Development and Research.

He notes that the 2015 American Housing Survey found there are nearly 48.5 million rental units in the US. Of those, 22.5 million are owned by 10.6 million individual investors, or an average of two units per individual landlord. These units are typically single-family homes, duplexes, and small apartment buildings. The other 25.8 million units are mostly large apartment complexes owned by around 1 million businesses.

Most landlords, whether individuals or businesses, have mortgages against their properties. After paying expenses (such as insurance, maintenance, repairs, taxes, and utilities) and mortgage payments, they are typically happy to break even. While larger businesses tend to be able to carry reserves to fund a short-term downturn in occupancy, individual investors usually have little to no reserves. Unlike the larger landlords, when their single unit properties are empty or miss a rent payment, they lose 100% of their rental income. To make the mortgage payment they usually need to dig into the income from their own employment that covers their family budget.

As the unemployment rolls explode, the COVID-19 crisis is just beginning to affect individual landlords. Many of these landlords will soon be facing mortgage payments, property taxes, and maintenance costs they may struggle to pay.

Even more threatening, many municipalities are considering freezing rents or requiring landlords to forgive up to 3 months of rent. My guess is such a requirement would cause some individual landlords to declare bankruptcy. Others may need to obtain loans to pay their expenses that will take years to repay. All that may be on top of the landlord having lost their own job and joined the ranks of the unemployed.

So far, the CARES Act, PPP program, or EIDL contain no relief for small landlords. Small landlords find themselves in a tough situation. Most completely understand the economic crisis and don’t have the heart to evict a tenant during this tough economic time. Yet, unless they get relief from the requirement to pay property taxes, utilities, and mortgage payments, many will be financially squeezed beyond what they can endure.

Yes, as a landlord you can build wealth slowly over a period of years. You can go broke, too. The risks of owning residential real estate are substantial, especially during a crisis like the one we face today.

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