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Using rental properties to generate passive income has been a popular strategy in the financial independence, retire early movement. The coronavirus pandemic is threatening it.
Many property owners have seen their rental streams dry up or slow as unemployment has surged and businesses have closed, leaving landlords with tenants unable to pay, either in part or in full. While more households paid their rent in May as unemployment benefits and stimulus payments kicked in, the level of delinquencies is still elevated and landlords are having to adjust to the disrupted income streams.
Even so, Brent Sutherland, a certified financial planner and founder at Ntellivest, believes its still a good time to be invested in rental properties. Sutherland is an adherent to financial independence and owns rental properties himself, so he offers these tips for managing real-estate investments during this economic downturn.
Be honest with your tenantsand your lenders. Whether dealing with tenants who cant pay, or your mortgage broker, Sutherland recommends opening up lines of communication early.
If you havent already, reach out to tenants and ask them if financial hardship will prevent them from paying their rent. If yes, consider working with them to create a payment plan for when they do go back to work, or offer rent forgiveness for a period of time, contingent on the tenant signing a lease extension. Vacancy is a top concern for rental property owners, Sutherland says, so confidence in having tenants in the future may be worth low cash flow now.
If reduced rental income has made mortgage payments difficult or impossible to make, talk to your lender as soon as you can. All federally backed mortgages are eligible for forbearance during the crisis. Lenders may be willing to offer forbearance or loan modification for loans that arent federally backed, as well, given the magnitude of the economic crisis.
Dont panic, but reassess. Downturns are a natural part of the economic cycle and can be a good opportunity for investors to reassess their assets. If an investor cant sleep at night knowing whats happening with their investments, its likely they were in the wrong asset mix to begin with, Sutherland says.
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He urges investors to avoid a fire sale of their properties if they can help it. However, once market volatility has stabilized you can give your investment strategy and risk tolerance an honest evaluation. At that point, he says, if you realize you no longer want to take on the risks of rental property ownership, you can pursue the sale of your properties in favor of other investments.
Sutherland believes rents will rise again as the market starts to recover and social-distancing measures allow people to start working again. In the meantime, the advisor says people may need to find ways to replace lost rental income, including taking up a freelance side gig or selling less volatile securities, such as bonds, in order to have more cash on hand.
Make the most of current conditions. One positive aspect of the current downturn is that interest rates are at historic lows, making borrowing cheaper than ever before.
For those whove already built up equity in a property, taking out a home equity line of credit, or Heloc, could help cover living expenses for a while, if necessary. That Heloc could also be used to make improvements to a rental property thats sitting vacantsprucing it up to add to its rental or resale value in the future.
For those looking to increase their holdings, desirable properties may be newly within reach for those with the extra cash to buy them. Not only are interest rates low right now, home prices in some areas could also fall. That combination can be a boon for a savvy investor, Sutherland says. I rather welcome downturns. This is where better investments can be had.
Write to us at retirement@barrons.com
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