June 2020 Newsletter
Baseball Season May be on Hold but the Curveballs Keep Coming
As we navigate through the continual curve balls of 2020, many find themselves wondering “What challenge will we face next?”. From the Corona virus and its economic effects, to major political and social issues, to giant Asian “Murder hornets” (Yes! They are a real thing, click here for details) 2020 has definitely changed the way most operate on a day to day basis.

Of all the curve balls of 2020, its first has had the largest impact on the real estate rental market. COVID-19 has caused quite a scare for landlords and tenants alike. As Texas progresses into phase two of economic reopening (click here for more details on phase two) Frontline Property Management, Inc. is dedicated to keeping our investors informed. 
Delinquency & Evictions
Throughout the progression of COVID-19 the governments, both local and federal, have taken multiple steps to protect renters. However, none of the steps have eliminated the obligation of tenants to pay rent. For any tenants facing hardships, communication was their first life line. Payment plans were set or special arrangements made on an as-needed basis with tenant verification and owner approval.

Our goal is to work closely with our tenants who have fallen behind in order to bring their account current. In the event that we are unable to do so, and eviction becomes a necessary evil, we will communicate with our investors in order to ensure that we are working in their best interest while staying legally compliant.

The Texas Supreme Court has lifted the moratorium on evictions. However, the CARES Act (click here for a full copy of the act) is still in place halting evictions on tenants living in units with federally-backed loans until July 25th, 2020 and preventing landlords from charging late fees. After the 25th, eviction notices must provide the tenant 30 days to vacate the property prior to the landlord filing for eviction.

Mortgage Deferment Versus Forbearance
While the CARES Act provided needed relief for tenants, it was rather lacking in homeowner and investor relief. As such, many have begun searching for mortgage relief such as mortgage deferment and mortgage forbearance. Unfortunately, these two terms are often used interchangeably, misleading those enacting these options. While both similarly allow the borrower to temporarily stop making payments they differ in what happens once the agreed upon time expires.

Mortgage Deferment allows the borrower to repay the money over time or add it to the end of their loan period. Mortgage Forbearance, on the other hand, is an agreement between you and your lender that typically occurs when you have been late and the lender agrees not to foreclose on the property during the forbearance period. At the end of the forbearance period, the missed payments are due in one lump sum. 

If you think you may need mortgage assistance in the near future the key is to call your lender and discuss your options before they are needed.
Just like Baseball is a team sport, the same is true for real estate investing. Our team here at Frontline Property Management, Inc. is committed to helping you adjust your swing in order to increase your batting average and knock those curveballs out of the park.

“You can’t control the curveballs life throws you, so you have to learn how to control yourself and change quickly to make sure the curveball doesn’t knock you out.” 
-Mark Edwards
Jay Hartley MPM®, RMP®
 Owner - Managing Partner
Office | 817.377.3190
Direct | 817.288.5546
Cell | 817.308.1309

Frontline Property Management, Inc.
3000 Race Street, Suite 132
Fort Worth, TX 76111

The CARES Act Eviction Moratorium

How Does the CARES Act Impact Landlords?
The Coronavirus Aid, Relief, and Economic Security Act—cutely monikered with the acronym CARES, as Congress so loves to do—included sweeping measures that impacted nearly every single American. But one section proved particularly relevant to landlords.

The CARES Act suspended evictions for 120 days, from March 27 through July 24, 2020, for a wide range of properties. Those properties include:

  • Properties with Conforming Loans: All properties secured by a mortgage owned or securitized by the federal government, particularly Fannie Mae and Freddie Mac.
  • Properties with Federally Insured or Guaranteed Loans: All properties secured by FHA, VA, or USDA loans.
  • Rentals with Section 8 & Housing Choice Voucher Tenants: All properties with tenants paying with vouchers. That includes public housing projects.
  • Properties Using LIHTC: All properties where the owner takes the Low Income Housing Tax Credit when filing their tax return.

That, of course, leaves many other rental properties unaffected. The two loan-based inclusions, for example, apply to mortgage loans designed for homeowners, not landlords. Even if landlords sometimes use them for house hacking or other savvy financing tactics.

Still, it does suspend evictions at millions of rental properties across the country. Note that the act prohibits landlords from even beginning the process by serving an eviction notice to cure or vacate. The suspension applies across the board, not just for nonpayment of rent, so landlords can't non-renew leases or evict for other lease violations such as criminal activity or abusing their properties. The act also stipulates that after the suspension ends, landlords must provide tenants at least 30 days’ written notice before requiring them to vacate.

The CARES Act marks only one of several potential eviction restrictions on landlords right now.
Eviction Roadblocks Beyond the CARES Act

Even if none of the CARES Act property stipulations apply to you, you still may not be able to evict tenants violating your lease.

Many states, counties, and cities have declared local eviction moratoriums, preventing any evictions for any reason within their jurisdictions. Some come with explicit timelines, others left the suspension open-ended.

Nor do landlords' enforcement challenges end with express moratoriums. Even in many landlord-friendlier jurisdictions, civil courts remain closed. Landlords can't complete the eviction process without a rent court hearing, which leaves them with no practical way to remove tenants in violation of their lease contract.

Screening Implications
It’s not easy to fill vacant rental units during the pandemic. I know—I’ve been trying to do it.

But I’ve also been even pickier than usual right now. If I can’t enforce a lease contract, then I’m effectively signing a lease based on the renter’s character and my belief that they will honor the agreement.

Not that it comes down to character alone. Many unemployed tenants simply can’t afford to make rent payments right now.

So, you also need to scrutinize the applicants' jobs, under the cold light of the pandemic. How likely is it that they'll be able to continue working? Because not all careers are getting hit evenly by the coronavirus-induced recession. Nurses have far greater job security than, say, bartenders right now.

I’d rather leave my property vacant than rent it to someone who will damage and wear the property without paying rents, who I can’t evict for the foreseeable future. And make no mistake: you can’t assume that the initial timelines, such as the CARES Act 120 days, will be the end of it.
Final Thoughts

While real estate has historically beaten stocks handily in recessions, this time investors face not just threats from the market and economy but also threats from legislation and the legal environment.

Until the legal environment becomes clearer, I’m extremely cautious about buying new rental properties. It’s a politically dangerous time to be a landlord, and what lawmakers fail to grasp about vilifying landlords is that investors won’t put money in rental housing if they don’t have protections under the law.

I love real estate as an asset class. But landlords should be careful they don't find themselves an unwilling subsidizer of other people's housing.
Up & Coming

Summer is Coming.... Are the Evictions?
Many state residential eviction moratoriums enacted to help renters crushed by the corona virus fallout expire this summer, some in only a week or two, raising the possibility of a mass of evictions nationwide.

“We sort of expect this to be more of a renter crisis than a home ownership crisis,” Elora Lee Raymond, an assistant professor at Georgia Tech who focuses on affordable housing and real estate, told the New York Times.

That is because renters have been more likely to lose their jobs than homeowners their houses during the pandemic.

Many of the millions of jobs lost since March are among lower-wage workers, who tend to be renters. According to the Federal Reserve, 39% of adults working in February with a household income below $40K/year suffered a job loss in March, while another 6% had their hours cut or took unpaid leave.
According to the Bureau of Labor Statistics data released on Thursday, there have been nearly 41 million new jobless claims since mid-March, when the economy began contracting. 

The CARES Act payment and beefed up unemployment insurance have helped tide renters over the last few months, but that support isn't meant to be indefinite. 

As of May 20, 90.8% of apartment households made a full or partial rent payment, according to the National Multifamily Housing Council’s Rent Payment Tracker. That is a 2.2 percentage point drop compared with a year ago, and up from the 89.2% who had paid as of April 20 this year. 

Still, that number reflects only part of the U.S. renter population, those who live in 11.4 million units of professionally managed apartments. All together, about 43 million U.S. households are renters.
Is It Safe to Invest in Real Estate Right Now?
Here's 7 Ways to Mitigate Your Risk!
What you want to do is stack as many investing cards in your favor as possible. Get back to fundamentals, if you will.

First and foremost, ensure you are abiding by the four tenets of conservative investing (capital preservation, cash flow, appreciation, and tax benefits), as well as identifying solid growth markets that yield cash flow and are poised for modest appreciation.

However, as you move through the following months, there are a few additional considerations to include in your underwriting and due diligence process.

1. Lower ARV—Especially in a BRRRR Project
Go into this year calculating a 10-15% discount in ARV projections during the refinance phase of the project. That doesn’t mean that prices will drop (they may even go up!). However, if you have stress-tested your financial model, acknowledge that the market could soften by the time you are ready to refinance your project, and leave a little capital in to complete the deal, you will have far fewer surprises.

2. Higher Vacancy During Your First Year
The current vacancy data from any property manager is from a pre-COVID environment. If you go into the first year underwriting 25-30% higher vacancy rates, screen your tenants for income and employment, and carry adequate reserves to weather this storm, you will be well-positioned to carry your investment through this tumultuous time.
3. Lower Market Rents
If you are putting a unit into service (say, with a BRRRR), you want to ensure you have room within your rents to remain competitive in the market. This isn’t the time to do an infinite return deal with only $10 cash flow (on a good day). Stress-test your rent underwriting to be 10-15% under the market rents.

This doesn’t mean rents will soften this much, but you will be able to sleep far better at night if you know that your business plan still works even if you have to bring down rents for a few months. You can also consider doing shorter leases with the lower rents and re-evaluate the market in six to nine months.

4. Lower Rent Growth
Vacancy is your No. 1 income killer. If you have an occupied unit, ask yourself if it makes sense for you to risk a turnover for a 2-3% rent increase.

For me, I have seven units turning this summer, all with great long-term tenants. It didn't make sense for me to risk a turn for $30/month by the time I factor in turn costs, lease-up fees, and the unknown financial situation of the next tenant. Therefore, we renewed three of the seven at their current rents (four others are pending for late summer) and will continue to evaluate this plan throughout the summer months.
5. Construction Budget
As we move through this market, think about keeping expenses low and more cash in your pocket. Cash on hand is vital for your business.

Can you pick up a property and hold off on the rehab for a year or two until everything stabilizes? Or can you do a smaller rehab to preserve cash and tackle larger items later?

6. Expectations on Lending
If you need commercial lending to complete a BRRRR deal, it’s well known that most commercial lenders aren’t doling out loans currently. Those that are, are doing so cautiously with a much lower LTV and are lending to borrowers with up to 12 months of reserves and a proven track record.

Qualifying is not very feasible for a new BRRRR investor who is on their first deal and can’t even do a conventional refinance.

As a result, you may find yourself in a situation where you need to partner with someone more experienced to get access to commercial financing. If you have a rock-solid deal, there are plenty of investors who would partner up (50% of a deal is better than 0% of no deal).

7. Multiple Exits
Just like in a pre-COVID environment, think about purchasing deals where you have multiple exits. For example, could you do a traditional flip, flip to an investor, BRRRR, buy and hold, wholesale, JV partnership, corporate rental, etc.?

Underwriting your deal for multiple exit possibilities will give you ultimate flexibility as you move through the next year.
Pulling It All Together
To wrap up, here are the seven ways to stress-test underwriting expectations:

  1. Lower your ARV.
  2. Lower your market rents for one to two years.
  3. Lower your rent growth for one to two years.
  4. Increase your economic vacancy for year one.
  5. Increase your contingency for construction
  6. Increase the need for lending reserves, or possibly bring on a partner.
  7. Explore multiple exit strategies to mitigate your risk.

It’s a myth—don’t believe that you can’t invest in this market. Will it be easy? Probably not. But it is definitely doable!
Check us out on social media!