Today, renters owe $70 billion in unpaid rent reports Moody’s Analytics. We have to assume that landlords will never see any of that unpaid rent. The real story is who owes the money. The vast majority of the $70 billion owed comes from Class B and C properties, while the Class A properties do just fine.
Class A properties, make up the highest quality buildings in any market. Built within the last 10 years or so, they are well-marketed, and built with high-quality construction. They command the highest rents and are rented to top tenants who earn the highest income. Of those tenants who earn $100,000-plus, only 5 percent are behind in their rent. That makes sense. What’s more, 93.8 percent of all tenants in Class A apartments had paid their rent in December.
Who is left? Most other rental properties, and they are in trouble along with many of the renters who occupy the Class B and C properties. The overwhelming majority of the unpaid rent is owed for these properties, by these tenants, and to these landlords. In September 2020, more than one-third, 35.2 percent, of landlords who own class B and C properties didn’t receive all the rent owed them. In October, that number grew to 38.1 percent reported the National Multi Housing Council in its Rent Payment Tracker Survey. That means only 61.9 percent of landlords were likely to receive all the rent in October, a far cry from the 93.8 percent of Class A properties.
The average renter who hasn’t paid rent owes about four months’ worth, or $4625, reports the National Apartment Association. And, of course, with the eviction moratorium, their landlords can’t kick them out, for that anyway.
Class C properties are buildings that are looking at least a little shabby, have a dated exterior and interiors with limited amenities, and may be at least 30 years old. These are the properties often rented by people who may have less than a high school education and work in industries most affected by government shutdowns. The Washington Post in a January 27 article reported that less than half, 48 percent, of this demographic had jobs, and continued, “In three of the biggest sectors for lower-education workers, over a million jobs are missing compared to Dec. 2019.”
One-to-four units properties make up virtually all rental properties, some 97 percent, regardless of class, reports the Census Bureau. About three-quarters, 73 percent, are owned by individual investors. Add those owned by LPs, LLPs, or LLCs and almost nine of 10, 88 percent are accounted for. And those owners manage them themselves in about the same percentage as are owned by individual investors, 73 percent. Agents or management companies manage another 22 percent, to total 95 percent of all one-to-four unit properties.
Bob Pinnegar, CEO of the National Apartment Association reporting on a survey the NAA did said, “nearly one-in-five of two-to-four unit properties said they could not sustain operations for more than a year at current delinquency rates.”
Just as in all multifamily properties, rents pay for the mortgage, taxes, and insurance to keep the properties operating. When half a duplex isn’t paying rent, that hurts a lot more than if one unit in a 20-unit property isn’t paying rent, and even less in a 100-unit property. These owners are living on a prayer with their reserves exhausting rapidly while they try to keep their properties functioning. Add to that the fact that about one-third of smaller landlords are 65 and older, mostly retired, and may not have another source of income besides the rent. Pinnegar of the NAA worries that “There is a risk of losing these units from the rental housing stock entirely.” Rental owners will let leases expire, evict for reasons that have nothing to do with unpaid rent such as lying on a rental application and violating the terms of the rental agreement, and remove their rental from the market in utter hopelessness and/or sell to owner-occupants.
Efforts at correcting this problem may be coming too little, too late. Urban.org reports that landlords have become more cautious with their screening with 35.6 percent having tightened their rental criteria. A lot of good that does with so many units occupied by tenants who can’t pay rent and can’t be evicted. The “new and improved” criteria include a higher credit score and higher income. But the horse has escaped the barn and just now they are closing the door.
One solution , which is easy for individual landlords, costs little or nothing, and sends unqualified applicants away, is a professional image. That’s one reason Class A properties attract top tenants. It starts with retrofitting a Class C property to look as much like a Class A as possible. Look at what Class A properties do to keep them in tip-top shape. It’s property packaging: curb appeal; professional looking For Rent signs rather than a hand-scrawled piece of cardboard or sign bought from Office Depot with the phone number messily written with a felt-tipped pen; a professional-looking website and/or Facebook page with photos; appealing-looking marketing materials such as property flyers; and carefully crafted and written rental policies and standards. Those tell less-than-qualified applicants that they would be dealing with a businesslike landlord, and says “run to the next one who may not be as careful.”
There’s not much we can do about the $70 billion in unpaid rent that’s growing every month and most likely will never be paid. But we can discourage unqualified applicants with a professional image and careful screening.
By Robert L. Cain
