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How does COVID 19 impact my rental property?

If you follow real estate news, I am sure you have read the bay area home prices are growing in double digits even during the COVID 19 pandemic. The home affordability problem is exacerbated while people are most vulnerable. Fortunately, home sales is only one side of the housing equation. The other side of the equation, the rental market, is far less talked about.

Rent is reduced 15-20% across different cities of the bay area

According to Zumper March National Rent Report, San Francisco bay area rent has dropped anywhere between 15-25% during the pandemic. The more urban the rental location, the more severe the drop. Most of the appeal of urban living was wiped out by the closure of restaurants & bars. Night life is nothing but watching Netflix. Many workers whose jobs allow them to work from home moved out of the expensive bay area after their leases ended. Vacancy rate in the urban areas shot up all of a sudden. An extraordinarily high vacancy and a weak demand put an enormous pressure on asking rent. To help put things in perspective, a San Francisco 2 bedroom vacant unit used to rent $8400 is now only renting for $6700, a whopping 20% drop.

Numbers with more bedrooms are disproportionally impacted

Owning even a small condo unit in the college town Berkeley used to be a very profitable business for a landlord. I bet the rental unit bearly had any vacancy in the past. Not any more. Students used to turn a 1 bedroom unit into a 2 bedroom by putting a bed in a living room partitioned by a curtain. Now, students are less willing to share rooms or apartments. Students who can afford it will want the unit for themselves. Those who can’t, will simply pack their belongings and move back home. Classes are online-only anyway. According to Rentometer.com, the more bedrooms the unit has, the more it’s impacted COVID. A 3 bedroom unit used to house 6 students can now only house 3, assuming they are still willing to share, that is. With people 3 students to split the rent, the budget shrinks quite a bit.

Berkeley Rent 1 2 3 bedroomsNumber of rental showings needed to rent a unit is decreased

Due to the decrease in rent, leasing agents are collecting a proportionally smaller commission check. There is one silver lining out of this looming picture; it takes less showings to rent out a unit.

As a property manager serving the bay area, we have first hand data. 70% of our units take 8 showings or less to rent out after the bay area shelter-in-place started in March 2020. Compare that to pre-COVID era, 70% of our units were rented out in 13 showings or less.

Pre-COVID vs In-COVID rental showing pattern
Pre-COVID vs In-COVID rental showing pattern

In the diagram above, one can easily identify the shift to the left between two series of data. We attribute this to the change in tenant behavior. Before the COVID 19 pandemic, going out to tour apartments is a fun activity to do with friends and family as a renter. After the pandemic, renters who want to move do most of the research online. In early April, renters were so cautious that we rented out several units via video tours only. In one case, the prospective tenant signed a lease based on 3D WALKINTOURs alone.

Should you lease or should you sell?

As rental property owners, should you rent your property or should you sell it? As a full service real estate firm, we have helped many rental property owners rent out their units and also helped numerous owners sold their units. We realize the hold-and-lease vs sell decision boils down to two things:

Sell your single family home rentals

If you are a landlord owning a single family home, you are in luck. You will realize your property value grew dramatically in 2020 while the rent you can get dipped slightly. In some areas, you may see a small increase in rent. If you have a vacancy right now or will soon have a vacancy, we recommend selling your property now to take advantage of the single family home buying frenzy.

One big reason against renting out the single family home is, the rental laws in California is significantly favoring tenants in the COVID 19 pandemic. The law allows tenants to not pay rent and stay in your rental property if tenant experiences COVID 19 related financial hardship. While a tenant may receive rent relief or rental assistance from various organizations, a landlord has few remedy at her disposal. You cannot charge late fees and you cannot evict the tenant. The Judicial Council of California once stopped accepting any eviction case, period. Although courts start to process them now as the pandemic eases, there is a huge backlog of cases to process. Evicting a tenant that experienced COVID 19 related financial hardship is basically out of question. If you rent out your single family homes now, there is no telling what cards the new tenant may pull out.

Hold onto your condo or multifamily property

If your rental property is a multi-family unit, your rent is most likely reduced during the pandemic, whether due to tenant asking rent credit or increased vacancy. You may also realize the property value of your condo also dropped. That is caused by a shift of buyers’ demand from condo to single family homes. During the pandemic, who wants to share an elevator and hallway with a neighbor? We recommend holding onto your property because we believe this buyer demand shift is temporary during the COVID 19 crisis. Its value will bounce back. Selling it now does nothing but benefit the buyer.

While holding onto your property, one way to hedge your risk against tenant not paying rent is to rent it out to non-profit organizations. There are many such organizations that provide transitional housing to homeless families such as East Oakland Community Project and victims of domestic violence such as Ruby’s Place. These non profit organizations receive grants from federal and state governments to fund meaningful projects to the society. Once they commit on your lease, they set the fund aside to ensure they can meet the rent payment obligation during the term of the lease. As a rental housing provider, we are proud to have worked with these organizations with a good experience.

To sell or the hold is a complex decision. This article is barely scratching the surface of this topic. There are many more factors to consider that’s beyond the scope of this article. If you want to get advice for your specific case, feel free to get in touch with us (team@theCalAgents.com) and one of our agents will help assess your specific situation.

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Lex Shan

Lex is a real estate broker, real estate developer, entrepreneur and technologist. He has started an architectural design firm, real estate development private equity fund and California's largest real estate 3D marketing company.

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