Would you believe that as recently as only two weeks ago, I was considering a property in Florida for AirBnB arbitrage. I've also been looking for properties here in Raleigh / Durham, North Carolina that might work well for short-term rental via AirBnB and other such sites. Then the Earth suffered an Alien Invasion (micro-aliens) in the form of Corona-virus. And now I'm happy that I don't have any short-term rentals, and that at least half of my long-term rentals are Section 8.
Welcome to Episode #52 - Section 8 vs. AirBnB
So, we're a week + into the Zombie Apocalypse, or Alien Invasion or whatever post-apocalyptic scenario you had in the pool. Someone do the bracket on that - since this whole COVID-19 thing brings all new meaning to "March Madness" - and I was really looking forward to this tournament with no truly dominant team this year. Sucks now to be a sports fan.
So with everyone's talking about nothing other than Corona-virus - I'll avoid going into all that, you can easily get elsewhere, and with a lot more expertise than I can offer. But the take I do have on this relates to what this show is all about - Rental Real Estate Investing.
As I've said on several prior shows, when I got into this (and even before) - everyone had a horror story. Tenants will destroy your property. You'll get 2 AM calls about toilet troubles. And most of all, Tenants won't pay their rent on time - if at all.
Well, here we are now in a time when it's highly likely that Tenants may not be able to pay their rent - and it could be argued that it is through no fault of their own. Now sure, there's a debate to be had on living paycheck to paycheck and if its reasonable to expect a person to have some number of months of savings on hand to get through situations just like this. But then also, this is a pretty unprecedented situation. Can you really plan for this!? Maybe, but also maybe reasonably not.
And so my family had those same fears that Tenants wouldn't pay rent on time (if at all) - and I'd constantly be in court evicting people. Yet, in reality, I've never had to take anyone to court. I haven't had a single eviction. But with what we have at play here, not only may Tenants across the country (mine and yours) be unable to pay their rent - we may not be able to evict them (if we wanted to). And then that's another question... Would you even want to evict a previously good Tenant, if they're unable to pay rent now because of this occurrence that is affecting EVERYONE? I mean, this is one of the few times when its not a cliche to say that "we're all in this together".
Now I've got a few Tenants with a history of late payments, so a week from now when April 1st rolls around - who's going to be the fool? As I certainly don't expect anything different from those few Tenants - they're always late, so they're going to be late again here also. But NOW it's HIGHLY likely that my other Tenants who are NEVER late - will be now. And that's one of the things that my family has always feared about this business. Can you find tenant's for each property; and will they pay the rent?
And my mother has been concerned for me since I got into Rental Real Estate Investing. And like her, those who have never done this business - or did it wrong. Have 1st or 2nd hand (maybe 3rd hand) horror stories that they just can't get past. But she was actually comforted by the fact that half my properties (and soon to be more than half) are Section 8. The expectation there being that most (if not all) of the rent for those units is paid by the Government - so if nothing else, I'm certain to at least get that rent.
So this combined with that fact that all of my properties are cash-flow positive - so even partial payment of a Tenant's rent may be enough to cover the mortgage. And then it appears mortgage holders may be implementing a forbearance on payments. Now some of my loans are with a hard money / rehab lender, and are still in that short-term / first year - prior to refinance into a 30-year fixed - so it's less likely they'll waive payments. And then I have some short-term loans with Private Lenders that I'll pay regardless - because I'll want them to have no fear of lending to me again.
So yea, when your buying properties with "Other Peoples Money" (OPM), and especially when its an individual and your dealing with their retirement savings... You have a higher responsibility with that money, so just keep that in mind throughout this ordeal. When its a bank, the deal is that you'll make the payment, or they'll get he collateral - the property. But when its an individual, they don't want the headache of taking back the property. They want their money, and you MUST act accordingly in their best interest - or you won't be using Private Money for long.
So in all this, knowing that I'll have continued income from Section 8 - was a comfort to those who care about me, and have whatever fears about Rental Properties. And I like knowing that also. And while I certainly couldn't have predicted THIS - it was in my thought process, that if nothing else, I could depend on getting my Government portion of the Section 8 rent... At least short of a real Alien Invasion.
But what about those who are into short-term rentals - AirBnB? Wow, I would be a bit sick right now if I owned properties that had mortgages and no means of generating income - since no one is travelling right now. And I don't know if it would be better or worse to actually own those properties outright, with a mortgage, or to be in an arbitrage situation (like what I was considering) - where you're now on the hook for a lease that you can't generate any income from the property to pay.
But maybe its no different than my situation with the Barbershop I opened last month in Durham - which has now been ordered by the City to close - along with just about every other business. And even that really doesn't matter - it wasn't like a ton of people were coming in to get cuts so that they would look good sitting at home. But this business location now has a lease, and the business can't generate any income to PAY that lease... So what happens there?
It's a reversal of rolls, where now I (along with my business partner in the Barbershop) - WE are the Tenant. And if I can't pay the rent because the business isn't able to remain open and generate an income - how is that any different than MY Tenant who can't work to generate an income to pay rent to ME?
So as we navigate this situation, we've got to look at things from the other side, and remember - "there but for the grace of God, go I". And we are all in this together. But I'm glad I didn't pull the trigger on the AirBnB arbitrage opportunity, as then I'd have more than just a Barbershop to carry - with a lease that it can't generate any money to pay. And I'm grateful that half my rental units are Section 8 - because at least I have that money guaranteed to be coming in.
And then this brings to mind the MANY conversations I've had on BiggerPockets.com and at the various events I've attended - about both Section 8 and AirBnB. As with everything, you'll run into people that love what they love - and seem to essentially hate everything else. Those who hate short-term rentals, hate it and won't even consider getting involved in the business. And those who love short-term rentals, AirBnb, love it - and think that it beats all else.
And among Landlords, not much sparks a hotter debate than Section 8. So many hate the program and all that it represents, and hate the participants as well. Ok, and when I say "hate" - they just don't believe in any form of Government subsidy or assistance.
So this will be an interesting situation, as we may all soon be the grateful recipients of some government assistance. For those Landlords who don't believe in such things, I know they won't refuse their Tenants paying rent with the Government check they'll likely be getting in the next few weeks.
And for those Landlords who participate in the Section 8 program, they'll likely fare better than other who don't. As how certain are you that your Tenants will use the funds from that Government check to pay YOU (the Landlord), when they know you won't likely (or even can't) evict them for non-payment of rent. Many Cities have effectively halted all evictions.
Regardless, there is one thing of which we can be certain - which is that no one will be using their check to pay for a short-term rental. No one will likely be doing anything on AirBnB anytime soon. And even once travel resumes, how will the short-term rental, that ecosystem fare in a recession?
So my take away from all this is that I was right to have been dragged my feet on short-term rentals all these years and especially here recently. Hopefully those who go in the business early have made enough money (and not spent it all) - that they can hold on now and get through this mess. And hopefully short-term rental remains viable going forward. I think it will... We'll get back to the point where travel resumes, as will vacations. I've been on so many cruises I can't count them. My 12 year old son has been on 5, and that was true when he was 11 - so I'm certain to be getting on another cruise.
But just like I've got half my Tenants as Section 8 to make sure that I maintain a certain level of stable (pretty much guaranteed) income - those with short-term rentals need to have a plan in place as to how they're going to cover those property expenses when the properties themselves are unable to generate income.
Maybe you should have a certain number of paid off Section 8 Rentals for every AirBnB - so that one can cover the other when we have our next global pandemic? Just saying... Landlords & short-term rental devotees... What do you think about Section 8 now? I'll have my ACH deposit on the 3rd, no different than any other month. There's a certain comfort in that - not just felt by my mother.
April Fools Day is a little more than a week from now. But what that day means to me, is the same as any 1st of the month... It's the day RENT is due. But on this April 1st - the joke may truly be on me (and all Landlords)... Because there may be no rent coming in due to COVID-19.
But this episode of the... and Landlord Rental Real Estate Investing Podcast is about how half of my rental units are occupied by Tenants who have Section 8 Vouchers. Thus, a portion of my monthly rents come directly from the Government. This means the joke won't be completely on me. At least I'll have some amount of guaranteed rental income. But for my non-Section 8 Tenants...
The World has essentially shut-down. Most businesses are closed (or greatly reduced), so those workers aren't getting their normal paychecks. Some businesses are running reduced hours and altered workloads, but even those must often layoff workers in a situation like this. You can't keep all those employees on payroll when there are no customers. And if those now unemployed (X-employee's) are your Tenant's - how are they going to pay rent to you?
And then compare this to those who are invested in short-term rentals (AirBnB). No one is travelling - so they have basically lost 100% of their rental income. Yet mortgages and leases remain due for payment. Maybe payments will be waived or some sort of forbearance will be granted. But in this episode of the Landlord Podcast, I contrast my situation with Section 8 Rentals, to those who have Short-Term (AirBnB) Rentals.
Just saying... Right now, I'm happy to know that I'll have some rental income in April. And I think I'd be freaking out right now if I was singularly and all-in on AirBnB.