Should you require your tenants to pay rent if they are impacted by the government shut down?

Right now the talk on IG is whether people with rentals should require their tenants to pay rent if they work for the government and therefore aren’t getting paid right now. To that my obvious answer is yes. Why? Because business is business. As a landlord you must always be firm on your tenants and run your rental property business as just that, an exchange of a service or a product for money. This will teach your tenants to respect your rules, and it will also teach them to improve themselves. You are not doing anyone any favors by going light on them.

Despite the obvious YES, there are some realities that you must face as a landlord. Just because you require them to pay the rent doesn’t mean you will get it. If they don’t have it to give to you then you can’t get it. Then what are you going to do? Bills still must be paid and obligations must be taken care of.

The successful landlord prepared for this. The successful landlord has reserves. The successful landlord has insurance and can weather the storm. The unsuccessful landlord has thousands in mortgage payments that must get paid. What are they going to do?

Depends on the state you are in

Something to consider is the state that you are in. You have to abide by the landlord tenant laws in your state which can determine what you as a landlord can do and how long it will take to do it. Some states are slower to evict than other states. Some states allow you to turn the unit in less than thirty days.

Here is a list of landlord friendly states: Texas, Indiana, Colorado, Georgia, Kentucky, Mississippi, Arizona, Florida. These states allow landlords to quickly wield their rights when there is a lease violation.

If the tenant can’t pay but you can’t timely evict you will be forced to then figure out how you are going to pay the mortgage. We recommend using cash for keys and paying the tenants’ moving expenses to leave. You can also just wait out the process and hope the government solves their issues as they always do and avoid losing a good tenant. Again, just because you require them to pay doesn’t mean the money will magically appear. You might just end up waiting just like them.

Something to consider is that if you were to evict them they have a great case because their loss of income is outside of their control and the fault of the government. You might just be in bed with them while you wait it out together.

That said, being a landlord requires responsibility for the unknown and the unfortunate situations that people you depend on find themselves in

I can’t say this enough but as a business owner it is your responsibility to have cash stashed just for the sake of having cash stashed. I read somewhere that Berkshire Hathaway, Warren Buffet’s company, always keeps a large hoard of cash. Currently that amount is 111 billion dollars. They do this for a reason. They do this to protect their investments and they do this to take advantage of opportunities that present themselves.

Now don’t just assume that all business owners understand this principle. Most are flying by the seat of their pants. Most have success but can’t protect their success. Don’t be like these business owners. Be the smart business owner that makes money for the sake of making it not for the sake of spending it.

Doing business and hoping everything goes right while you have slim margins is a way to lose your shirt WHEN the market corrects. I didn’t say IF.

Business interruption insurance

The beauty of being in business is that you can insure almost anything. It costs you money but it also protects your position at the top.

Business interruption insurance continues to pay the bills in the event that your business is unable to. This is helpful but this isn’t the solution to a long term downturn like I expect. It is also not likely to cover your business unless a government shut down can be considered a natural disaster.

There are other options though.

Rent Loss Insurance

Rent loss insurance replaces the income lost due to damage beyond your control.
Rent loss insurance is available from most major property insurance companies. While the insurance covers you if your property becomes uninhabitable through no fault of your own, it is important to understand under what circumstances rent loss insurance kicks in, and what it will not cover. Rent loss insurance will not cover damage due to owner negligence. 

Rent Guarantee Insurance

Rent guarantee insurance is similar to rent loss insurance, but the tenant is the one who pays the premium. Relatively new in the United States, rent guarantee insurance has been available to British landlords for decades. Rent guarantee insurance is most often used in situations in which a tenant doesn’t have the credit score necessary to rent a pricey dwelling or they haven’t worked at their job for very long. If the tenant is otherwise a good candidate, the landlord may stipulate that the tenant pay rent guarantee insurance.

If you have a mortgage on your rental units, your lender will likely require you to carry rent loss insurance just as it requires property and liability insurance.

As a business and property owner it is important that you protect what you own and what you build. Its not enough to become successful and wealthy you must also put as much effort into protecting what you have as you did to obtain what you have.

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Thanks for reading!

Be great, invest well,

Todd Millionaire


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