My Big Picture Thoughts for Landlords in the early days of COVID-19
Aside from one’s own personal sense of obligations to those in need, I believe that society as a whole bears the obligation to help those in need, at all times, and most especially in extraordinarily challenging times.
At this COVID-19 time a great many Canadians are in need. The Federal & Provincial governments are honouring society’s obligations by way of the many and growing supports, now at a point where it appears that no-one is at risk of not being able to pay for food and shelter and medical costs.
Governments leaned on the banks to provide payment deferrals to Canadians, and to support that are providing liquidity to those banks to allow the banks to do what the federal government has asked. This is an extension of the gov’t providing the obligated supports to Canadians in need.
Landlords taking deferrals does not deprive Canadian homeowners of their own opportunities to take deferrals. The banks won’t run out of capacity to offer deferrals because the federal Gov’t won’t allow that to happen.
Through all this, no matter if we were to take mortgage payment deferrals or not, we will stand by our good (mostly long-term) tenants and support them as they work their way through this. The rules Alberta Premier Jason Kenney announced on March 27th are essentially what we believe that we and our tenants should do. And we’ve conveyed that to our tenants.
With all the above in mind, we decided to apply for mortgage payment deferrals on our rental properties to buttress our cash reserves. Once we are through this if we have extra cash remaining we will use it to pay down those mortgages or to pay down any HELOC debt we then have on our rentals. Note- the interest rate is higher on the HELOCs than on our mortgages. If we were in property acquisition mode we would use such funds towards purchases.
On the Income Tax Implications of Payment Deferrals
I have been told by an Accountant that mortgage interest that is deferred is still a tax deductible expense. Hence, mortgage interest deferred within a tax year will itself NOT reduce taxable income. Check with your own tax advisor to know your tax implications in advance.
So if you believe your cash-flows may become impaired over the coming months due to lost or reduced rents and/or increased vacancies you have the option of protecting your liquidity with mortgage payment deferrals for up to 6 months, and perhaps longer depending on how this goes. You can always cancel them if at any time you decide you don’t need them.
On working through this with your Tenants
Rent is due. It’s a contract. Nothing stops you from offering deferrals to those in need, but do a proper needs test of that, much as many banks are doing when you ask them for a mortgage payment deferral.
You can of course later forgive any amounts of rents deferred as you choose to, but starting out with forgiveness instead of deferrals will fundamentally change the relationship, and maybe forever.
Provincial and federal governments have done easily enough to ensure nearly 100% of all renters will have enough income to pay their rent.
Think about what tenants’ payment priorities are:
2) Non-elective child care and medical costs
3) If Applicable: Child support and Alimony payments
And after the rent comes everything else, like auto payments, credit card payments, student loans, personal loans, personal lines of credit – and note, all of those are eligible for payment deferrals.
Nobody doesn’t want to pay a landlord who they know, and who they like/respect, and who has treated them well and is responsive to trouble calls on the property.
Have you or your Property Manager personally called all your tenants to check in and ask how are they doing?