Podcast: Decreasing Rent During Tough Times | Ep. 199

Posted by Ed McKnight on 16/04/20
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Show Notes

What's Covered in the Show?

In this episode, we discuss how to decrease your tenants' rent during the Coronavirus shut down the right way.

Some New Zealanders are doing it tough at the moment, struggling to get by. As landlords, that may include some of our tenants. That means that there is more risk that our tenants won't make their rental payments.

That's concerning because property investors still have mortgages and other rental property expenses to pay.

So what is the best way to manage this?

Best practice suggests that property managers and self-managing landlords should reach out to their tenants early to talk about the tenant's financial position and whether they are struggling.

If they are struggling, then it is best to point the tenant towards the government subsidies that are currently available. After they have sought help, you can ascertain what the tenant is still able to pay.

You can then come to an agreement stating that you will carry forward the difference between the rent and what the tenant can afford to pay as a debt.

You should document this as a written agreement.

Once the shutdown has ended the tenant can then pay you back by a small amount each week e.g. $50.

But, be sure that the amount owed to you does not creep higher than the bond you have taken initially from the tenant. Otherwise, if the tenant leaves early it may be difficult to recoup the funds owed to you.

Transcript

Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're going to be talking about potentially decreasing your rent for tenants in tough times.

Now, obviously there are some New Zealanders out there who are doing it tough at the moment. There are people who are on 80% of their wage. There are some people who are just on the government subsidy and there, there are others who are going to, unfortunately, in the case of some Air New Zealand staff, just to use it as an example who are going to be made redundant.

And that's really unfortunate and it's really sad. Uh, some of those people are going to be renting and because they're doing it tough, they may ask for a rent reduction. They may ask, I've seen some landlords share that their tenants have asked for the rent to be forgiven. i.e. uh, not paid at all. Uh, and so we're going to talk about what is the kind of best practice, and this has come from both the Auckland Property Investors Association, uh, some of the things Andrew and I have talked about, uh, and kind of what we're seeing is the best practice at the moment.

Uh, and the first step is even though most people listening to this show will be using property managers, this is usually the process we'd go through, first of all, we'd seen the tenants off to figure out what support they can get from the government. So, um, you know, thank you, Mr tenant for bringing this to us, because I'd rather you tell me now that you're having a tough time rather than finding out later when the rent's not paid. Um, but let's go off this is, this is the sort of government support, that you might be able to get, go and see what you can actually get to get in a, in a kind of position if you haven't tapped into that already. Does that sound about right what you're thinking as well, Andrew?

Andrew Nicol: Yeah, absolutely. I mean, I think there's lots of that the government is doing right now to help people out. Um, make sure that everyone is taking advantage of that to the best of their ability. Uh, so that, so that we can all kind of get through this time.

Ed McKnight: That's right. And then the next thing as well, I would say, is to figure out what they can actually afford to pay. So I would never, realistically, um, expect no rent to be paid. Uh, you'd want at least something so that you can see that the tenant has really trying. So let's, let's just give an example. Say that your, your property that you're renting out is $500 a week, and the tenants gone, they've gone to the government, they've got some support, and they say, look, we think we can do $350 a week. For the next four weeks. Uh, and then we'll see where we are.

Cool. So there's $150 difference between that, uh, that we'd need to decrease as a temporary decrease in order to, to keep this tenant, um, not, not put them into arrears, uh, and keep everybody happy. Um, now what you'd usually do after this is you would have a written agreement between the landlord and the tenant, and your property manager can facilitate this, uh, where you carry that rent forward. So it's carried forward as a debt because the tenant still owes you it. We're just moving things around so that they can, they can still afford it from a cashflow perspective.

Andrew Nicol: Yeah, and I think this is a really important thing because it doesn't set the precedent that this is just a free for all where you can, where a tenant can just, um, forego their obligation to pay rent. And I think unfortunately, there will be some tenants out there that will try and take advantage of things that they can just go around, not pay their rent at the moment, because, you know, how are they going to be evicted when we're in isolation, which is, which is a fair point. But, um, our message from our property managers is that, hey we're here to help uh, but you are still obligated to pay your, be responsible for your rent because the landlord, uh, all of us, we're still responsible for paying our mortgage. And so, so we can't kind of forget that fact.

Ed McKnight: Yes, and, and the other thing as well, once the mortgage holiday, uh, was kind of announced, we're going to talk more about that in a future episode as well, I know that, uh, Venture Management, our property management firm, uh, they don't laugh at that, some people that are like, Oh, I thought you were laughing, you were wheezing or something like that. I can't see Andrew at the moment because we are both in isolation. Um, but as soon as some of these announcements, uh, were even just being floated, like I remember the, uh, there was a, in a couple of news articles that came out talking about that maybe all rent would just not be paid for a while, or they would be something like that. And there are just a couple of articles that were very early stage ideas. And, uh, Linda was, was already getting tenants, uh, messaging in, emailing in again saying, Hey, does this mean we don't have to pay pay rent this week? To which she said, no, no, you definitely still have to pay rent. Um, but, but there are questions that are going to come from tenants, and so you've got to weed out which ones are, are people really doing it tough and other people who are just having a go.

Andrew Nicol: The funny thing is the ones that were asking that question were the ones that always missed their rent payments anyway. So it really didn't change anything.

Ed McKnight: Well, that's really unfortunate. Um, and so what you'd do is you'd carry that rent forward. So at let's go back to our example where it was a $500 a week, uh, rental, they could still afford $350. So we're carrying it forward $150 a week, and that debt will be paid off potentially at something like $50 a week, uh, when their income is retuning. And an example of this would be, uh, someone where a job or occupation, where, the isolation is really temporary and their job will come back. So I'm thinking about hospitality workers, gardeners, trades people, uh, people where, there is work. It's just that they can't physically go and complete the service over the next 28 days. And so they would be able to afford to pay it off, potentially at something like $50 a week over the next 12 weeks in order to make up for that total of $600 that's $150 difference over four weeks.

Andrew Nicol: Um, I think also just one thing I'll point out here and again, I come across as being the, uh, hard one in this conversation and I'm not, if your tenants need help, uh, at let's give everyone a break right now and figure it out. But if they don't talk to you and they stop making their rent payments, and it's really important that if you're not using a property manager, you keep on top of the, uh, legislative, uh, responsibilities that you have. Um, for example, the 21 day notice, so if you're using a property manager, they'll take care of this for you. Uh, in instance that someone's not paying their rent, you still have to serve them a 21 day notice to remedy because you don't want to come out the other end of this and even be chasing it up then, and it becomes a snowball that's spiralling out of control.

Ed McKnight: And I think good property managers are proactively talking to tenants as well, and figuring out, you know, and saying, talk to us in advance. We don't want to find out that you can't afford it or that you're going through a tough time. When we noticed that the money's not in the bank account, talk to us in advance, then we can sort it out. Then we can put a plan in place. And one other little tip I would say as well is make sure that the accumulated rent uh, that your, that accumulated debt, so $150 a week times however many weeks, doesn't exceed the amount of bond that you've taken. So in that scenario, uh, you, it was $500 a week house, maybe you took four weeks rent. So $2,000. Make sure the total debt doesn't go above that because then if your tenant gives notice and leaves, it's going to be very hard to get the extra bit off them. Because then they've walked away. You can pursue it through the tenancy tribunal, but it might get paid back at $10 a week in the end. Uh, and, and the real issue, particularly in, in times like this where money's a bit tight for a lot of people, is cashflow. And so the fact that you get it back at $10 a week or $20 a week isn't much comfort, uh, if you don't have the cash to be able to keep paying your mortgage in that instance. So that's, that's sort little tip there, don't let that total amount of, of debt that your, your kind of, uh, lending essentially to the tenant don't let it exceed the bond because otherwise it's very hard to recover.

Andrew Nicol: Uh, just one other thing. A wee trick that I heard of yesterday, so one of our property managers was going to advertise a property online for, for rent, um, but then realized that it could become the target for people who, uh, don't have a house at the moment and they just move on in there. They'd break on it or steal, uh, it was a finished unit, steal the furniture. So someone wanted to view it the day before isolation, but take it much later. So that was, that was a real, uh, alarm bell for me, cause thought well just got to be really careful because no one's actually monitoring these properties in the same way, uh, as it would be, uh, in the event that we're not in isolation.

Ed McKnight: Yeah. And I'm just monitoring, uh, listings as well. Just because I like to keep my eye on the market. I'm seeing a lot more private rentals come onto the market. People renting privately, uh, as opposed to listings coming on from property management firms.

Andrew Nicol: That would likely be people that are just going to break isolation and go and show people through, I would say.

Ed McKnight: Well, that's true, and I'm also seeing, a lot of apartments, so that's probably people trying to convert Airbnbs into residential tenancies.

Andrew Nicol: Absolutely, that's going to be a major shift that we're going to see in the next wee while, uh, and certainly I know for a fact, Queenstown are seeing a lot of this at the moment, one of my clients there is a great property manager, most awarded property manager in the country. She is just finding a lot of properties come back onto the market that were Airbnbs.

Ed McKnight: And we'll talk, we'll cover that more as well in a future episode on...

Andrew Nicol: Sorry about that, spoiler alert.

Ed McKnight: Not it's ok, but we'll go into more into the details later on. But let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. It's our absolute pleasure to bring to you every day what we believe is really high quality, uh, information about the property market and property investment and rating and reviewing, subscribing. That really does help us get the message out to more people. And look, one thing you can do to help us out is just in the, the bubbles that we're all in. Uh, if, if you are isolating with somebody, just let them know about the, that you're listening to the Property Academy podcast and, if they're interested, maybe they'll start giving it listen too. It'll really help us out. Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market. Until next time.