Question: Will defaults on rental properties hurt landlords?
With the reported rates of defaults on rental property – let alone home mortgages – how does one mitigate the cash flow damage to a portfolio of rental properties, and especially if the properties are leveraged? Has anyone factored in this great a disruption in their investment property portfolio that may last for many months or years? How will the property owners remain solvent, not just profitable under these circumstances? Thank you!
Anonymous Dentist , Phoenix, AZ
David’s Answer: Good question! While we are only a few months into the coronavirus pandemic, the reports of “defaults on rental property and home mortgages” are thus far greatly exaggerated. Reports at this point are rents are running well over 90% of normal collections. However, as you suggest, that could certainly change.
I am suggesting a “COVID-19 adjustment factor” of 20% as a potential reduction in cash flows on single family rentals or homeowner borrowers.
My buying criteria for single family houses provides for a minimum of $250.00 per month net cash flow over and above all property expenses AND any debt service. Therefore, if I have a property that pre-COVID rented for $1,200 per month, the post-COVID adjustment factor of 20% would bring that rent to $960 per month ($240 less than the scheduled rent).
Since my buying criteria requires a $250 per month net cash flow, I am still above a breakeven point in this scenario. In other words, I’d be okay.
I began my real estate wealth building portfolio with single-family home rentals and four decades later, that has been my most stable wealth and cash flow asset. COVID-19 will not change that. In fact, it will further support my premise that real estate has historically been, and will continue to be, the best wealth builder and protector. Because of the inefficiencies of the real estate market (which is to our benefit), it’s WHO you know and not WHAT you know that counts.
Website: www.FreedomFounders.com Email: DrPhelps@FreedomFounders.com Phone (call or text): (972) 203-6960
