By one estimate, U.S. landlords were owed about $57 billion in unpaid back rent at the beginning of 2021. The average household that fell behind owed about four months of rent, or $5,600. Altogether, more than 10 million U.S. families were facing the possibility of eviction.1
Many landlords, including those who depend on rent payments for retirement income, have experienced financial difficulties in lockstep with their heavily impacted tenants. Although multi-family apartment complexes are often owned by large corporations, about 90% of single-family rentals are owned by small investors who are facing the risk of mortgage default, bankruptcy, or forced property sales.2
Fortunately, the March 2021 federal stimulus bill added almost $22 billion in housing assistance to the $25 billion previously allocated by Congress.3 In many cases, payments are being sent directly to landlords through new or existing local programs on behalf of renters who meet certain eligibility requirements.
Under the Emergency Rental Assistance Program (ERAP), the U.S. Treasury has distributed grants to states, cities, and counties with populations greater than 200,000 to be used for back-due rent and utility bills accrued after March 13, 2020. Eligibility is limited to households that earn less than 80% of the area’s median income, as defined by the Department of Housing and Urban Development.
Applicants must document their incomes, prove they qualified for unemployment benefits or suffered financial hardship due to COVID-19 that impacted their ability to pay rent, and submit unpaid bills or notices that demonstrate they are at risk of becoming homeless.
What can landlords do?
Tenants and landlords generally apply for the funds together, but the application process and guidelines differ from program to program. In some states, landlords may be asked to forgive a percentage of the rental arrears in exchange for larger rent payments.
If you are a landlord, you might reach out to tenants who are behind on rent and encourage them to explore any potential opportunities for financial assistance. Check the websites of your state and local housing agencies to find the status and requirements of various housing programs and how to apply. Of course, many higher-earning households won’t be eligible for help, and in areas with lots of lower-income renters, local programs could run dry quickly.
Evicting tenants can be a painful and expensive process. If you have tenants who fell behind but are trying to catch up, it may be advantageous to work out a payment program instead to help keep them in place.
Prepared by Broadridge Advisor Solutions. Copyright 2021.
Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.
One of the most common questions people ask is why they need (or what is the best) to use an LLC or umbrella coverage if they own rentals. If you are sued, you will want to have some form of protection to make sure your other assets like your primary residence and retirement accounts are safe. This is an important part of planning when you have rental property but unfortunately is often overlooked. Let’s review using an LLC or umbrella policy and discuss the merits of both.
Basics of Umbrella Policy
As the name implies umbrella insurance is a sort of catch-all that provides additional protection for the “What If’s” that works to protect you when you reach the limits of other insurance policies like homeowners or auto. Imagine you are sued for $1 million for a car accident you caused, and your auto insurance coverage only goes up to $500,000. If you are found at fault you would be on the hook for $500,000 without umbrella coverage but if you have umbrella coverage it would cover the remaining amount up to policy limits. Take a look at the example below:
The great thing is that with an umbrella policy you are protected whether something happens to you personally (i.e. auto accident) as well if something happens at your rental properties. Umbrella insurance provides great benefits for a relatively low cost. The downside is that if the claim exceeds your umbrella policy you are on the hook for the excess amount.
Basics of an LLC
A Limited Liability Company (LLC) is designed to provide asset protection by separating your personal property from your rentals. By establishing an LLC, if you get sued, they are suing the LLC and thus you are protecting your personal assets from the lawsuit and only the assets in the LLC are at risk.
If you have multiple properties it becomes expensive and difficult to qualify for the proper insurance amount. If there are multiple properties it is common to establish an LLC for each property for further protection. If you have a property in multiple states, you will need to establish an LLC in each state you have a rental. The disadvantage to LLCs is that the paperwork can be a pain and they can be expensive. For example, in California, it costs $800 a year for each LLC you have. This can be very expensive if you have multiple rental properties. Another drawback is getting a mortgage for a property in an LLC is more difficult and typically has higher interest rates.
What is best for me?
It will depend on your rental property strategy, your cash-flow, the risks you are willing to take, and your situation. Neither strategy is full proof, and both have important strengths and weaknesses. Please understand your state rules also impact which strategy is best for you. Please contact us or your attorney to discuss your situation in greater detail.