Federal eviction moratoriums lasted nearly 18 months, from early 2020 through late August 2021. Even after the federal eviction moratorium ended, many cities and states continued preventing landlords from enforcing their lease contracts.
Some cities went so far as to use federal tax dollars to give free legal aid to tenants to fight lawful evictions long after moratoriums ended. And that’s even after taxpayers paid for nearly 10 million rent assistance payments, albeit months after it did many landlords any good.
But that’s behind us, right? Never to happen again?
I don’t believe so. The precedent has been set, and eviction moratoriums are now in the government’s playbook. When it becomes politically expedient to do so—and it will, sooner or later—politicians will pay that card again.
It even makes a twisted sort of sense. Over a third of the U.S. population are renters, while a tiny fraction of that are landlords. And one of those groups is politically sympathetic, while the other is reviled.
Five years ago, no real estate investor considered eviction moratoriums a risk. Today, you should bake it into your investing calculus as one more risk and take steps to mitigate it.
As you invest moving forward, keep the following options in mind to reduce your risk of lease agreements becoming enforceable only by renters.
1. Invest in Commercial Real Estate (Not Offices, Though)
Pandemic-era eviction moratoriums only applied to residential leases. Commercial investors could still enforce their leases.
And no, that doesn’t just include office space, with all its current troubles. It also includes self-storage facilities, industrial real estate, retail space, hotels and hospitality, restaurants and bars, and beyond.
Of course, each one of those subcategories comes with its own unique risks and rewards. But one risk they don’t have is eviction moratoriums or the government handing money to tenants to fight lawful eviction.
2. Buy Rent Default Insurance
A relatively new option in the U.S., landlords can now buy rent default insurance that kicks in and pays the rent if tenants default, up to a point, at least. Most policies put a limit on the number of months’ rent they’ll pay while the landlord evicts the erstwhile renter and finds a replacement.
Some companies even structure these so that the tenant pays for the policy, not the landlord. The insurance company bundles it with damage insurance, designed to replace the tenant’s security deposit.
That helps you sleep at night knowing you’ll collect your rent no matter what, even if the tenant stops paying.
As a final point, note that you need these policies in place before the storm hits. During the eviction moratorium, some insurers paused underwriting these policies. Don’t just assume you can run out and buy a policy only if another eviction moratorium strikes.
3. Report Rents to Credit Bureaus
Even if landlords can’t enforce their lease contracts, they can at least make sure future landlords and creditors know that the renters defaulted and are a credit risk.
Reporting rent payments to the credit bureaus creates both a carrot and a stick, rewarding responsible tenants while penalizing bad actors. It adds another layer of accountability for rent payments, another consequence of defaulting beyond eviction.
4. Invest in Higher-Income Neighborhoods
There’s a correlation between income and credit, even if no one likes to talk about it. The higher the socioeconomic bracket, the more people engage with banking and credit markets. In turn, consumers also take more care of their credit histories.
Fewer high-income renters defaulted during the pandemic eviction moratoriums. You can offer up plenty of explanations for this, such as knowledge workers’ easier transition to remote work, but the fact remains that higher earners tend to take better care of their credit in good times and in bad.
5. Screen for Government-Subsidized Rents
You can also take advantage of renting to lower-income tenants whose rents are paid by the government.
I’ve had my share of bad experiences with Section 8, but I’ll say this for them: they didn’t default on rent during the eviction moratoriums. The same goes for other government agencies that subsidize rents for various niche recipients.
Subsidized renters come with other risks, of course, such as property damage, expensive repairs from annual inspections, red tape, and difficulty in removing bad tenants. But at least you don’t have to worry about rent defaults.
6. Avoid Anti-Landlord Cities
I will never invest in “tenant-friendly” cities again.
I hail from Baltimore originally, and I cut my teeth there as a real estate investor. The laws are so anti-investor that I sold all my properties and never looked back.
For example, it once took me 11 months to evict a non-paying tenant. And that was years before the eviction moratoriums of the pandemic. Other anti-landlord regulations include:
- Onerous rental registrations and U&O inspections.
- The requirement that landlords renew lease agreements with almost no exceptions.
- Laws requiring landlords to store tenants’ abandoned junk.
- Expensive state-level lead paint inspections and registrations.
Baltimore City doesn’t like landlords, which is their prerogative. And they get to live with the consequence that experienced mom-and-pop landlords largely shun it. That leaves novice landlords who don’t know what they’re doing and faceless corporate landlords with the resources to navigate the choppy waters of anti-landlord regulation.
Tenant-friendly states and cities were quick to impose their own eviction moratoriums during the pandemic and slow to lift them long after the federal moratorium ended. If a deep recession were to hit tomorrow, I wouldn’t put it past any of these cities or states to implement another eviction moratorium.
7. Operate Short-Term Rentals
If you operate your rental property as a hospitality business, eviction moratoriums don’t apply to it.
Consider investing in high-yield vacation rental markets. Ideally, you want to buy properties that cash flow well as a vacation rental or as a long-term rental, offering a contingency in case one strategy gets undermined by regulation.
Of course, you’d need to operate the property as a short-term rental before an eviction moratorium strikes. Once an eviction moratorium is announced, you’re stuck with any long-term tenants living in your properties until they leave voluntarily.
In unaffordable cities without enough new housing construction—like, say, San Francisco—lawmakers are quick to throw every regulatory solution behind bolstering tenants except actually fixing the problem by adding new housing supply. Rent control, rent stabilization, restrictive security deposit rules, lease renewal requirements for landlords (but not renters), and a dozen other regulations all make for an anti-investor environment.
That regulation keeps expanding alongside affordability problems in these cities and states. With nearly half of millennials skipping meals to try to afford housing, I don’t see any end to this cat-and-mouse game of anti-landlord regulators using every trick in the book to placate angst-riddled renters.
You might like living in these cities yourself, and there’s nothing wrong with that. My brother loves living in Los Angeles, and it suits his politics. But that doesn’t mean he buys rental properties there, and you, too, should think twice about protecting yourself against government intervention in rental markets, both present and future.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.