Some of you have contacted us asking about how the coronavirus (COVID-19) may affect our investments.
Although we have never dealt with an issue like this, the good news is that we expect our exposure to be limited.
Let me explain what I mean by “limited.” We don’t know how all of this will play out in the end but here is what we do know. In the interim, we know that some of the families who rent from us are going to be affected by a change in employment, temporarily lower income, or challenges caused by the current health crisis, and other unknown factors that will arise over time. As that happens we will address each situation on an individual basis and determine the best course of action if they are unable to pay rent.
Every day our property managers are working with our tenants over problems that arise. This won’t be any different. We already know who the good tenants, the chronically late tenants, and the problem tenants are. Our property management policies dictate that we work through the challenges to find the best outcome for all involved. This is a normal workday for us. For families who have a legitimate reason for being late or who can’t pay the full amount in rent, our policy is not to forgive any of the rent owed but to set up payment plans to get them back to a current balance. We will continue to do just that.
However, we know over the following months that we are going to deal with a much higher number of late rents and families not being able to pay the full amount. This will affect the net profits for that time period. What we don’t know is how much and for how long – so please don’t call and ask us to predict that for you. Our crystal ball rolled off the desk last week and shattered into a thousand pieces.
What else we know is that this too shall pass as we are a country of resilient people, and if I could be a little biased for a moment, the Midwest people are some of the toughest in the country. That is one of the reasons why we like those markets (Cleveland, Toledo, and Akron/Canton, Ohio; St. Louis, Missouri; Memphis, Tennessee; and Birmingham, Alabama). Also, since they are not huge tourist destinations like Las Vegas, they should be less affected.
Other things that may affect us, that we don’t have control over, are programs and policies the government may enact. We are getting conflicting information and want to make sure we convey the most up-to-date information to you as we learn it. According to various news sources we’ve been following, the courts in Cleveland won’t process any evictions until April 20th. This is probably more of a social distancing from the courts than it is a moratorium enacted by Cleveland, but the city council plans on voting on March 23rd whether they want to enact a 60-day moratorium on evictions. We always have some evictions in process; that is the nature of the business and obviously, this will delay them and others.
In St. Louis, evictions are currently halted and we have been unable to find a definitive date for when evictions are allowed to resume.
President Trump announced a moratorium on foreclosures and evictions for single-family homeowners with FHA-insured mortgages for the next 60 days. That doesn’t affect us, but sometimes these decisions spill over into other areas.
These laws, moratoriums, and declarations are changing so fast that we have rewritten this part of this article three times already as new information is presented.
There are some efforts that may help alleviate the stress on our tenant families right now. The federal government may give out $1,000 to some taxpayers, which would certainly help our families who are renting. Plus, a large portion of our families don’t rely on income from a job. They have Social Security, disability benefits, or are subsidized by the government through Section 8. Those renters won’t be affected. Additionally, those who lose their jobs can collect unemployment. Non-profits can help, such as United Way and CHN Housing Partners in Cleveland. There are many opportunities for our families to stay afloat during this challenging time. Our property managers are working diligently on finding all available resources that could be of assistance and will be passing on the information.
Finally, here are some other points I would like to make as to why we see the impact as limited. As in any investment, the scariest part is the unknown, especially when it appears out of thin air in a black swan event such as the COVID-19 pandemic. None of us could have predicted this, nor was it on the radar of “what ifs.” But the good news is that our rental homes in the Midwest haven’t lost any value. The rents and the cash flow will be affected, but only by a limited amount. Unlike the stock market, which has lost around 30% of its value and all of its gains from the last 4 years, our value remains as long as there are families who need a place to live in those cities. We don’t see that changing. Our investments are built to be long-term, and this will hopefully be just a small hiccup in the grand scheme of things.
We will remain vigilant and keep you updated about what we are encountering in the market and with our families as things unfold and we learn more. In the meantime, we wish you and your family good health.
Greg Hughes and Steve Sixberry
Hughes Private Capital Investment Managers