REI INK

Should I Allow Pets in My Rental Properties?

Pet-friendly rentals can mean more revenue, a larger pool of tenants and longer leases. Making the decision to invest in residential real estate is an excellent step in the right direction toward building wealth. While this is a wise choice, there are many things to consider to get the best return on your investment. Although many investors consider the obvious, such as where to market and whether to hire a professional property manager, many overlook the not-so-obvious decisions until they are confronted with them. One of those is whether you should accept pets in your rental properties. Finding quality tenants is a big hurdle, so should you exclude tenants who would otherwise be desirable because they have a pet? Here are some things to consider as you decide whether your rental property will be pet-friendly? Did you know that accepting pets could generate additional revenue for yourinvestment property? Most states allow reasonable nonrefundable pet fees and pet rent to be charged to residents who have pets. Be sure to pay attention to the term fee versus the deposit; deposits are refundable. And, always check state statutes to be sure you are in compliance with your fees. Can I charge a pet deposit, pet fees or pet rent for residents who have an assistance/service/support animal? No, you are not able to charge any additional fees to a resident with an assistance/service/support animal. If my resident has an assistance/service/support animal and the animal causes damage to my property, can I deduct damage costs from the security deposit? Yes, if the animal causes damage to the property, you can deduct the cost of repairs from the security deposit. You should process the security deposit as you normally would within your state’s statutory requirements. I still have concerns about accepting pets. Even more concerning is determining the validity of assistance/service/support animals (determining the validity of a reasonable accommodation request). Is there any way I can protect myself? Deciding whether to be pet friendly is a big decision. Should you set parameters on the type of pet, weight, breed restrictions? How do you know if the resident is being truthful about the type of pet they have or if they have a pet at all? How do you know if the pet has bitten anyone or if the pet is housebroken? What about validating animal accommodation requests? Are you confident that you (or your staff) know the allowable questions for validating an accommodation request? Thankfully, like other tools to help make managing rental properties a little less tricky, there is a solution that can help with this too. Thousands of investors and property managers across the country are using Petscreening.com to streamline their pet policies and to handle validating their accommodation requests so they don’t have to worry about asking the wrong questions and end up in a pile of poop. Still thinking about whether or not you should accept pets in your rentals? Maybe this will help: As of 2019, approximately 72% of renters have pets. This is a significant jump from 43% in 2014. However, 55% of landlords do not accept pets. That means 45% of landlords will likely earn 72% of the rental business. How does this affect no-pet rental properties? Having a no-pet policy will likely mean longer vacancy periods and potential for unauthorized pets in your properties. Conversely, being pet friendly can decrease vacancy periods and generate additional revenue. Residents who find pet-friendly housing have an average lease of 26 months versus 18 months for those that are not pet-friendly. So, do you want shorter vacancy periods, more revenue and longer leases? Then you pawsitively should consider being pet friendly.

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Do Your Homework on Coinsurance

Coinsurance can be costly if you don’t understand the penalties. You’re a savvy investor. You make sound, confident decisions about the properties you’ve added to your portfolio. And your strategy has been successful. Yet even the most successful real estate investors can be snagged by the penalties associated with valuation and coinsurance, outlined in the fine print on your insurance policy. If you’re like most bullish investors, you’re probably heavily leveraged and work with lenders when acquiring new properties. Every dollar counts. You know that the lower your property is valued, the lower the insurance premium you will pay to cover it. You may have bargained for a great deal to acquire your property and you’ve calculated that should something happen, it may cost even less to replace the property. But, your insurer may put a higher replacement value on your property. That’s as it should be because you can’t rebuild to even the current property status for your purchase price. Discrepancies in valuation have become one of the biggest challenges in the property insurance industry. Gone are the days of guaranteed replacement cost policies where properties were simply replaced outright, no matter what. Mass damage from events such as hurricanes put an end to those offerings. They also put several smaller insurance carriers out of business. To compensate, today most insurers require your property to be coinsured for most of its replacement value. What Is Coinsurance? What is a coinsurance requirement? Although the term is used widely, sometimes it is confused with “copay.” And the term takes on a very specific meaning in property insurance. Coinsurance is the percentage of value you are required to insure against the value of your property. Usually, this is around 80%, and it is a typical bank lending requirement for most loans. The tricky part is that the replacement value is determined by your insurance company only after the damaging incident. But if you insured your property for less than the coinsurance percentage to pay a lower premium, then you will be hit with a coinsurance penalty. This amount can be costly at best and put you out of business at worst, especially if you have several properties impacted by weather or other events simultaneously. To help clarify, here’s an example: You own a multifamily rental property that you calculate can be replaced for $375,000. Your insurance carrier is requiring you to have at least 80% in coverage. You purchase $300,000 in coverage (80% of value), believing you are compliant. Suddenly, you have $100,000 in damage. But your insurer determines the replacement cost is $500,000. Your insurer will calculate how much to pay on the claim by dividing the coverage amount you bought ($300,000) by what you should have purchased (80% of $500,000, or $400,000 in coverage). In this case, it comes to 75%. So, for your claim of $100,000, you will only receive $75,000 (75%). The $25,000 difference is your coinsurance penalty. Again, the difference in value is key. Not knowing the replacement value that your insurer places on your property is one of the most surprising and costly issues investors at all levels face. This is not also calculating in any deductible amount. Although our example uses a coinsurance requirement of 80%, some policies require even more—up to 90% or 100%. Protecting Yourself To overcome the replacement value issue and avoid a costly penalty, the best practice is free and easy—talk with your agent. Here’s what you need to ask: 1)  Does your policy have a coinsurance penalty? (Most do)  2)  How much is your coinsurance penalty? 3)  What is your property’s replacement value? 4)  Have you properly insured your property? 5)  Are there any special requirements, such as coverage for floods? A sound agent will be completely transparent on your behalf and will tell you about any penalties you may not know about. Some insurance carriers will allow you to remove the coinsurance penalty—for a fee. In many cases, the additional cost to have it removed may be worth it in the long run. It’s also important to know that not all policies are the same. More mainstream insurance carriers may offer very general policies and try to make them seem all-inclusive. Some of these are called “basic” or “named peril” policies. The general policies have two lists: what is covered and what is excluded. It’s always better to work with an agent who specializes in property insurance. Ask whether a “Special” or “All Perils” policy is better for you. This type of policy may include waivers for things like water damage and theft. They cover all risks—unless they are explicitly called out on its list of exclusions. Special policies often cover significantly more than basic policies. Again, an experienced property insurance agent can fully answer your questions and will advise you on which type of policy is best for you. A reputable agent won’t try to win your business at the lowest price. As with many things in life, you will get what you pay for when it comes to property insurance coverage. Doing your homework will always pay off.

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Q&A With Growth Group’s Steven Cinelli

Futurist and growth advisor discusses outlook for the national and global economies Steven Cinelli is the founder of California-based Growth Group and the managing director of boutique advisory firm SLAMINA LLC. He also serves as an adviser for London-based fintech incubator and consulting firm FinTech4Good and has spent decades as a creative strategist, banker, adviser and fintech executive. Known for his uncanny ability to anticipate markets, Cinelli has been predicting the kind of global economic crisis catalyzed by COVID-19 for nearly two years now. “[In late 2018] we were in the middle of an alleged robust economy with a buoyant stock market, and most people did not want to hear the words ‘global meltdown’ or ‘global depression,’” Cinelli said. “The fundamental strength of the economy was surface-level, largely propelled by inexpensive debt within both private and public sectors. COVID-19 was merely the pin that popped the bubbles.” REI-INK sat down with Cinelli in mid-April—while most of the country was still in the middle of “shelter-in-place” and “safer-at-home” initiatives—to delve into his outlook for the national and global economies. Cinelli’s take on the economic situation at home and abroad was, as he put it, “certainly not a pretty picture,” but it opened some intriguing avenues of discussion relevant to real estate investors and the other business people who will likely bear the burden of supporting, bolstering and recreating the economy. What made you think the economy was in trouble so “early” compared to most analysts? It has been clear for some time that the fundamental strength of the U.S. economy was surface level. It seemed healthy, but when you started looking at the nature of employment and unemployment, you observe that we have a gig economy. People do not have steady jobs as they enjoyed years ago. They have one job today and a different job tomorrow. The government’s employment figures are “net” figures, the difference between new and lost jobs. The lost job number has been considerable for years; it’s just that new jobs outweighed the losses. Now, new jobs have come to a halt, and the unemployment figures will continue to increase. As mentioned, the economic performance is very surface-level, and—to further exacerbate the underlying instability—most people do not have very deep pockets (i.e., large savings). Just in the last four weeks, we have seen over 20 million individuals filing for unemployment benefits. Certain analysts claim the real unemployment rate is nearing 18%. That is unheard of. It matches the Great Depression. And when the economy reopens, whatever that means, how many of those who were laid off will be reabsorbed—and over what time period? The employment narrative has been part of the veneer of a very fragile economy. Certain asset classes, like equities and housing, have been fed by borrowing. When that window closes, the music stops and prices will fall. You ask why my forecast predates others: The biggest telltale sign was the rapid increase in overall debt levels without a corresponding increase in economic production. This has been clear since the early years of the expansion coming off the Great Recession. Cheap money has led to profligate spending and creating debt-fed asset bubbles. Think about this: If interest rates rose only by 300 basis points, we would virtually double the level of debt service in the economy, sucking a considerable amount of economic oxygen out of the room. Can the United States and real estate investors take any indicators or cues from what is happening globally to predict how things will look moving forward? One definitely has to assess things on a global basis now, not merely [look at the situation] in a domestic sense. There are fundamental weaknesses within all existing socio-economic systems right now, be they capitalism-democracy, socialism-autocracy, etc. In fact, these systems are, in many ways, becoming mirrors of each other. The capitalist U.S. has more safety-net programs and government regulation of industry than most and no longer ranks in the top capitalist countries in the world according to the Heritage Foundation. The recent CARES (Coronavirus Aid, Relief and Economic Security) Act and so-called stimulus programs, in my view, seem more socialist than capitalist, particularly those supporting big business. Why shouldn’t large corporations avail the capital markets for funding, rather than [take] a bailout from Uncle Sam? Furthermore, society has changed with technology continuing to influence behavior. As we move into the fourth industrial revolution, with artificial intelligence, internet of things, genome editing and other cyber-physical protocols, we will further alter the ways we live, work, interact and spend money. Our infrastructures must adapt to new realities, and one of the things that everyone must accept as soon as possible and be most concerned with is the level of debt the world’s challenged economies have taken on both before and during the COVID-19 outbreak. In the U.S., with this current transition, we could see our GDP drop to $15 trillion (down from $21 trillion). In conjunction with the stimulus bills, the CARES Act and deficit spending, we are likely to see federal debt move up to at least the $30 trillion level. Beyond that, we need to consider debt outside the federal level, like state and local municipalities, which carry almost $10 trillion, and household debt, like student loans, mortgages, auto loans and credit cards, which amounts to another $17 trillion. On top of that, consider the corporate debt in the marketplace today because many companies took on debt to buy back stock, which is probably another $9 trillion or $10 trillion and the unfunded pension and other statutory liabilities of nearly $150 trillion. Across the board, the level of debt in the U.S. is probably twice as much as it was in 2008. And with a shrinking economy, our debt to GDP ratio may approach Japan’s, at north of 200%. In simple terms: I believe the U.S. has moved to economic euthanasia. With such a financial situation, and with rates with no further room to drop, I fear that the debt

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5 Economic “Side Effects” of the Coronavirus

How you respond to them could mean the difference between the survival or total failure of your business. For real estate investors, COVID-19 hits very close to home. Literally. In some states, investors find themselves in terrible financial danger because they cannot finish their flips, show their properties, rent to new tenants or evict residents delinquent on their rents. In other states, the opposite is happening. Real estate investors are, as they naturally tend to be, serving as the backbone of troubled communities. They are creating new, affordable residences where people can live. They are working to provide financing and funding in an era where many banks will not or cannot do so. They are building new developments and renovating old buildings into new, productive spaces. As the true face of the coronavirus more fully emerges, we will continue to adjust and reevaluate how we look at the responses of our own businesses and states. Regardless of who opens “too early” or waits until “too late,” the country is certainly in the midst of some serious economic “side effects” of the virus that will directly impact real estate investors now and likely for years to come. Side Effect #1: 20% of children are not currently getting enough to eat. With school breakfast and lunch programs suspended along with school, many children are not getting nutritious meals. Although most public school systems and local support organizations like churches and food banks are working hard to fill the gap, many kids and their families will be underfed during the summer months. What does this have to do with real estate investors? It will affect families’ overall financial situations and likely how they choose to locate—or relocate—their children prior to fall, when schools currently plan to reopen. Districts that care for their hungry children throughout the summer and appear most likely to open in the fall will be attractive to families dealing with this harsh reality. Good Success Insight: This issue is relevant to investors on a more individual level as well. Check in on your tenants! You could help them stay afloat by connecting them with local services, and you might just keep their finances in a better state as well. Plus, it’s just the right thing to do. Side Effect #2: People are buying new things instead of remodeling. Big-box home-improvement stores like Home Depot appear likely to post banner earnings for the first quarter of the year. But, overall, Americans are spending more money on things for their homes—things like entertainment items, new furniture and décor—than they are on serious remodeling projects. Consider a comparison of Home Depot and Wayfair performances. During April 2020, Home Depot stock rose 12% in value. Wayfair, an online home goods retailer, grew revenues by “roughly 90%,” according to an online earnings call at the end of April. The company’s CEO, Niraj Shah, said the spike coincided with stay-at-home orders (which dramatically accelerated e-commerce adoption in the home goods category) and federal stimulus check mailings. For real estate investors, this shift means the era of HGTV-driven home design and home-buying could be shifting. If homeowners have more things they like to put in their houses, it may be necessary to cater to the looks and design trends appearing in online marketing pieces instead of to those appearing on reality real estate television. Side Effect #3: Young adults’ homeownership preferences will likely change—again. Just in time for the millennials to start recovering from the trauma of the Great Recession, coronavirus slammed into the junior portion of that population. And Gen Zers, who are just now graduating from college, have had their efforts to enter the workforce hit with a staggering and unprecedented trauma. Frequently ill-equipped to work remotely despite intimate familiarity with all things digital, Gen Z could be entering a period that may put many millennials’ delayed “launches” from their parents’ basements to shame. They are facing social distancing, remote learning, sky-high student loan debt and the highest U.S. unemployment rate on record. When Gen Z does leave the nest, it will likely be for an extended period of renting and without any feasible options for homeownership for at least a decade. Real estate investors will have an opportunity to provide solutions and options (e.g., various multifamily housing options that are affordable and meet the needs of today’s young adults). Many analysts predict that Gen Z may never feel any desire to own a home at all or be able to do so. However, it is more likely that Gen Z’s response to this pandemic will be similar to how millennials reacted to the housing crash and Great Recession: opt to rent longer but eventually move toward homeownership when their finances permit them to do so. Side Effect #4: Green is going to equal gold. Everyone has seen the walkers, the joggers, the bikers and the newly initiated nature lovers out there clogging up the roads, sidewalks and hiking trails. Whether COVID-19 turns out to be vulnerable to sunlight or not, everyone has a new appreciation for the outdoors these days. Homeowners and renters will be looking for areas where they can enjoy the outdoors while keeping a safe distance between themselves, their families and others. Proximity to parks, while always a value-add, is likely to become golden in the coming months, as is a high walkability score and the private patio or deck. In 2018, the National Association of Realtors and the National Association of Landscape Professionals predicted homeowners who added fire features that included a gas burner and patio area would reap a 67% return on investment upon sale. Today, estimates range from 78% ROI to more than 100%. Customers at local home goods stores are getting into fist fights over patio furniture. It seems safe to speculate outdoor living space is getting ready to have another big moment. Side Effect #5: Location is still going to be everything, but the costs are going to be more severe. As the year progresses

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One Company’s Experience Dealing with the Unknown of COVID-19

3 key questions we asked to determine our course of action Renters Warehouse was heading into a spring market that had great potential for us. New clients. New technology. We had just spent a year integrating the largest third-party management company in single-family rental (SFR) with a marketplace platform that enabled us to help customers buy, lease, own and sell SFR under one roof. The second quarter of 2020 was about to be legendary—and then COVID-19 hit. The unprecedented unknown was nerve-wracking. What’s the worse-case scenario? We couldn’t even really imagine the worst worst-case, because that was something from a horror movie. To put revenue numbers to these scenarios, we had to figure out how people were going to respond to the crisis. We made educated guesses about how people would react—and what that would mean to Renters Warehouse. Question 1: Were tenants going to pay the rent? Revenue for our landlord clients is rooted in tenants paying their rent. Some politicians ran to the microphone to encourage people to skip their rent payments. It was conceivable that as much as 50% of rents could be delinquent. As we tracked rent payments day by day in April, we found very quickly that our tenants, people who reside in single-family rentals with average rents of about $1,650 a month, were going to pay. In a normal month, 97% of the 22,000 rents we collect are paid on time. On April 1, 43% of our rents were paid. We finished the month at an astonishing 93% paid—just a few points below a normal month. We breathed a sigh of relief and started worrying about May. My personal love for SFR hit a new high March 1, 2020, when 58% of our tenants paid their rent on the very first day of the month. That was a record, and something clicked when we saw that. What is “essential” to life in America has taken on new meaning during this crisis. It’s now a subject of everyday conversation. Obviously, shelter is essential. After all, these days, the only way to keep your family safe is to go to a certain place and stay there. That place is home. But there is more to this. At a time when powerful people were chanting #CancelRent, we achieved the highest first-day rent collection percentage in company history. When things are tough and uncertain, people continuing to pay their rent is an indicator that housing stability is important. People aren‘t messing around with their housing situation. Question 2: Are we going to be able to continue renting homes? The question about rent being paid was about recurring income. For owners, that’s rent being paid. For a property management company, that’s management fees being paid. But would people sign new rental leases and buy investment property? That’s the other half of our business and it forced the question: Is movement in housing essential? In other words, in times like these, anyone who can stay in place probably will. So, who needs to move? For this we looked at the only historical comps we could find: the financial crisis of 2008 and the terrorist attacks of 2001. If the movement of people in a time a crisis was what we were trying to understand, 2008 home sales were a reasonable indicator. If no one in their right mind would buy or sell a home in a housing market “free fall,” who would still buy or sell because they had to? The answer was two-thirds. According to the National Association of Realtors, about 35% fewer homes were sold in the years after the crash of 2008 than during a normal housing market. Keep that number in your head. In 2001, I was on a management team that ran a decent-sized real estate brokerage in the New York City suburbs. After the terrorist attacks, the housing market froze. Everyone was hunkering down. I assume it was more intense in New York than in other parts of the country because we all knew people who had died, and many of us saw the smoke from the buildings with our own eyes. The city was the economic engine we depended on, and it had just been hit hard. We were wondering whether anyone would buy real estate in New York again. We wondered if this was the beginning of a new normal where restaurants and theaters were going to be bombed on a regular basis. If so, who would want to live near that? So, this time period and circumstance presented another reasonable comp for today—something totally unprecedented, unknown and out of left field. By October and November 2001, the market thawed out and the number of homes sales leveled off at a 35% reduction from where it was otherwise going to be. There is that number again. When no one wants to move, two of three people who were planning to move still do. So, at Renters Warehouse, we felt it was reasonable to forecast that 35% of the potential tenants we would have placed in the second quarter of 2020 would not move but 65% would probably still need to rent houses. We sounded the alarm to our agents to stay in the game. The pie would be smaller, but there was still going to be a pie, and we needed to get a healthy slice of it. Real estate agents on straight commission would be automatically furloughed if they didn’t stay productive, so it was critical to sell them on the expectation of a smaller, but active market. This was no time to go dormant. Here is how it played out. During the third week of February, our new tenant inquiries—our early indicators of tenant behavior—fell off a cliff. By the middle of March, they leveled off and stabilized at a 35% reduction from the norm. Since then, they have increased. In the final tally, our tenant placements in April were, you guessed it, about 35% off what we budgeted

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Charting Your Real Estate Investments Through Troubled Waters

Several factors are at play in the real estate market, but cash is still king. There’s been a lot of conversation about how COVID-19 will affect the U.S. residential real estate market. As real estate investors, we want to have current information with accurate updates so we can make informed decisions. Let’s take a quick look backward before we look ahead. Range of Impact Never in my lifetime have I seen a government shut down its economy due to a pandemic. When the Spanish flu invaded our country in 1918, more than 675,000 people died. Even though the first flu vaccine wasn’t developed until 1942, our economy withstood this brutal attack. As with the Spanish flu, the impact of COVID-19 on communities and regions has not been uniform across the country. As Thomas Garret points out in his white paper on the economic effects of the 1918 influenza pandemic, Pennsylvania, Maryland and Colorado had the highest mortality rates although those states had very little in common. From this example, can we discern that different areas of our country will experience different impacts and therefore outcomes? Cash Is Still King The past decade has been stellar in both the residential and the commercial real estate markets. The stock market had experienced unprecedented growth and new highs. One would think companies should have cash in their bank accounts. What a wonder to see how many large and small businesses applied for the Payment Protection Program along with the overwhelming loan applications for the SBA’s disaster relief loan. Remember, you can run a business with a loss, but you cannot run a business without cash flow. In vacation areas, there are investors who own multiple vacation rentals who will not be able to make more than one or two of their mortgage payments. There are many small investors across our country who have invested in multifamily. Some will not capture enough rents to meet their lender obligations. So, there will be upcoming deals for investors who are able to evaluate swiftly and fund quickly. These opportunities will be available for anyone who has access to cash, regardless if they’re large investors or small investor groups that pool their capital. Limited Access to Properties There are some obvious challenges currently facing buyers and sellers. For example, appraisers are not allowed out of their homes in some parts of the country due to shelter-in-place orders. And some folks simply don’t want those appraisers trampling through their home. Open houses are reduced to non-existent in many areas due to social distancing and sellers not wanting strangers in their homes, even if they are potential buyers. These conditions will stall loans and, hence, closings for those transactions. Flippers, however, do not care whether appraisers or buyers trample through their flip at 10 a.m. or 10 p.m. So, those transactions will get to the closing table as long as lenders don’t tighten requirements. Chase just announced new lending requirements for conventional loans is 20% down and a minimum 700 FICO score. The president said he was relaxing underwriter requirements for government loans for specific items (i.e., recent pay stubs, seasoned funds, etc.) to keep this industry fluid. If that happens (I have my doubts), then these loans will close. If these requirements are not lifted, we will see a dip in sales as well as a longer timeline for a lender to close. First-time homebuyers who have young children or older parents don’t want to chance spreading this contagious virus to these family members. In addition, many first-time homebuyers have had their lives disrupted working from home, taking salary cuts or, even worse, being furloughed. The National Association of Realtors reports existing-home sales fell 8.5% in March following a February that saw significant nationwide gains. Each of the four major regions reported a dip in sales, with the West suffering the largest decrease. Access to Cash The Fed rate is zero and probably won’t go much lower. So, the cost of money is still cheap. Access to that money, however, is a different story. The Department of Treasury is responsible for distributing those individual $1,200 checks the government is giving away. They are also responsible for sending out millions of monthly Social Security checks. Secretary Mnuchin acknowledged the delays in those checks getting out due to the IRS’ antiquated software and being short-staffed. Combine those tasks with working through the banks trying to distribute loans to small businesses. So, the flow of money is going to be stalled, leading to two quarters of negative growth. Economists call two consecutive quarters of negative growth a recession. An article in Financial Times informed us that France’s government is not putting together a bailout program. Rather, the French government just paid every business’s payroll, thereby continuing the flow of money. In this scenario, rents will be paid and jobs will be maintained until the pandemic is behind us. Rather than creating government bailout programs, this strategy tries to give some semblance of normalcy to people’s cash flow. Taxpayers would continue to receive paychecks that are deposited into their bank accounts, even though they’re not working. This creates at least four positive outcomes:  1)  Alleviates the pressure on unemployment benefits 2)  Jobs are held in place 3)  The job is waiting for employees upon their return 4)  Government isn’t burdened with excessive debt If I learned anything from 2008, it’s that real estate investors large and small will lead us out of the upcoming real estate rut. Many investors are in a cash position. Others will continue to have access to short-term loans along with established credit lines at big-box stores. I do not believe real estate prices will tank as they did in 2008 since the purchase of most personal residences in our country have not been overleveraged. But there will be a slight decrease in price by those motivated to sell. The pandemic has temporarily shut down our economy, and there will be an opportunity for all types of

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