As a general rule, I would normally say that it would be a bad idea to make a side deal, or an off the lease exchange, with a tenant. But, these are not normal times. The suppression of the economy due to the Covid-19 virus has forced many business to look at things differently.
Side deals are a common feature in the landlording business. Many landlords will make a deal with a tenant to trade some amount of rent for their labor, or perhaps even an appliance. For example, a landlord may waive part of the rent if the tenant agrees to paint their living room, or replaces their broken refrigerator. As I said, in general I am not in favor of such side deals. While on the surface side deals may seem like great ideas, it is my experience that these side deals tend lead to more problems than they solve. More on that a little later. Over the years I have found it much easier to just stick to the terms in the lease.
But, times are different now. Many tenants are likely to have a difficult time in the coming months making ends meet (some landlords too). Tenants will be faced with hard choices as their reserve funds dwindle. There are and will be calls for rent strikes and rent cancellations. We as landlords need to be aware of these situations and work to minimize the impact on our businesses, our properties and ultimately ourselves.
We have to ask ourselves if we would rather have vacant or occupied units? Do we want significant amounts of turnover and the costs associated with that turnover? How long can my reserves sustain these repeated turnover costs along with lack of rental income? Will we be able to find new tenants to replace those that have had to move due to covid-19 related financial stresses? Right now, in the middle of April, things may seem OK, but we are all still in the early stages of this suppression. What will the next several months bring? While I hope the overall impact is minor, it is perhaps to early to say with any certainty or that we are out of the woods.
Due to these circumstances I think it might be wise to consider side deals with tenants, especially if these deals can create a win/win for tenant and landlord. Would I recommend just making any kind of deal? No. Nothing illegal or unethical. But I might consider a payment plan for an otherwise great tenant who lost their job at a local hotel or restaurant. I might even consider using security deposits to cover rent for a while.
What would I not consider right now? Trading labor for rent. It just gets too complicated as I mentioned before. Sure the apartment needs to be repainted, but does your tenant even know how to paint? Painting is not rocket science but it does take some skill and practice. Will your tenants do an adequate job? Further, how do you define “adequate job?” I would bet that your and your tenant’s definition differ. And when these differences arise, they can just make matters worse.
Only you can decide what is best for your business, but in these unique times we landlords have to think about doing things differently than we did before. A side deal with a tenant may just be the way to go to keep a good tenant in place until they can get back on their feet again. Get as creative as you wish, but whatever you do, get it in writing, even just an e-mail if nothing else. How far do you let these side deals go? Hard to say right now. We may all just have to see how far this crisis and suppression goes.
Made any side deals with tenants due to the great suppression? If so what are they? Please share with a comment.
Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors. Subscribe to Smarterlandlording here. Contact Kevin here.