CASE STUDY
n March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to
I
alleviate burdens caused by the pandemic. One of those measures was to issue a 120-day eviction moratorium. When Congress did not extend the ban, the Centers for Disease Control and Prevention (CDC) took measures to do so. Ultimately, the Supreme Court struck down the measure, saying the CDC lacked the authority to issue the injunction and invited Congress to enact eviction moratoriums through proper legislation. UNINTENDED CONSEQUENCES OF THE EVICTION MORATORIUM Although Congress and the CDC were quick to protect renters, there was little to no discussion about the impact of eviction moratoriums on housing providers. The consequences of the moratoriums have led to increased costs, more burdensome processes, and often an untenable environment to conduct business, especially for small business owners. Here are some specific issues facing housing providers during an eviction moratorium: 1 RENTAL ASSISTANCE PASSED DIRECTLY TO THE RENTER. Rental assistance often went directly to the renter. In many cases, that assistance never made its way to the housing provider and was instead pocketed by the renter. 2 BURDENSOME DOCUMENTATION AND PROCESSES. Governing authorities’ processes created significant friction between renters and housing providers. These processes often led to the renter refusing to communicate or participate in the process altogether. 3 HOUSING PROVIDER CARRYING COSTS CONTINUED, DESPITE MORATORIUMS. Housing providers are still paying insurance, taxes, management, maintenance, and often mortgages. These costs are substantial, especially for small business owners who may have only one or two properties. 4 LACK OF DUE CARE BY THE RENTER. Armed with an eviction moratorium, many renters refused to make repairs for damages they created or even notify the housing provider about issues that needed to be resolved on the property.
To illustrate the micro-margins small business owner housing providers face, let’s look at an example of a single-family home investment property with a cost basis of $140,000. Note the expenses that continue through an eviction moratorium. For this example, we have also removed any vacancy assumptions.
Annual Income (Rent): Property Tax (0.67%)
$18,000
($938)
Insurance (0.95%) Maintenance (3%)
($1,330) ($4,200) ($1,400) ($1,260) ($9,120)
Improvements (1%) Management Fee (7%)
Mortgage
Annual Net Income
($248)
In this example, the housing provider is losing $248 per year and is counting on long-term appreciation. This is a poor investment, but one that is too common. To make ends meet, this housing provider may cut back where possible, typically on capital improvements or maintenance. This obviously has a long-term negative impact on the property and, therefore, the renter’s experience. Or, the housing provider may choose to self-manage the property. But if the provider is not equipped to do so properly, the renter may have a poor experience. The housing provider cannot choose to forego property tax, insurance, or the mortgage (the largest expense). Any interruption in the income stream (rent) is devastating and often results in the turnover of the property (at a discounted price) to another investor who increases rents and passes the expense to the renter. Eviction Moratoriums interrupt this income stream, putting the housing provider in a position to exit the business and sell the property. This action results in housing stock that is less affordable for the next renter. Eviction moratoriums increase the costs for housing providers and raise the cost for renters.
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