When the COVID-19 pandemic swept across North America in early 2020, it created a wave of income loss that impacted people from all walks of life. While some individuals have been hit harder than others, it’s difficult to find a group or industry that hasn’t been affected. A small segment of the population will have sufficient savings to fall back on, but the majority of Canadians who live paycheque to paycheque, will find it difficult to keep up.
There are ways to trim a budget and save a few dollars, but at the end of the day, a person’s basic needs must be met. Food and shelter are at the top of the list. This need was partially addressed through federal relief measures including the Canada Emergency Response Benefit (CERB), and again in a collective announcement by the six big Canadian banks, which promised new mortgage deferral options and more.
Unfortunately, many Canadians still aren’t making ends meet—and what options exist for those who don’t own their home but, instead, rent?
Many tenants are in financial distress, as are landlords who rely on rental income to survive. We spoke with Liz Schieck, a Certified Financial Planner with the New School of Finance in Toronto to get some advice for both renters and landlords feeling the impact of COVID-19.
Emily is a single mother who lives in a rental unit in Hamilton (we’ve withheld her last name to protect her privacy). In March, she was laid off from her job as a speech therapist due to COVID-19. Emily is currently receiving the federal government’s Canadian Emergency Response Benefit (CERB) payments, but they amount to less than half her previous income. Her savings ran out quickly and now her only other expected income is a tax refund cheque. Between rent, her car payment and insurance, she’s spent her CERB before buying groceries or paying other bills. Emily was unable to make her most recent rent payment and has started utilizing a food bank. Her landlord applied her rental deposit to the missed payment and cannot legally evict her at this time, but with no clear timeframe for a return to work, Emily is worried that she’ll have to move in with her parents.
Advice for renters on how to cope with COVID-19
Liz recommends that Emily do some simple calculations to get a clear picture of her monthly cash flow. She should assess everything that’s coming in—CERB and, likely, Canada Child Benefit (CCB) payments—then determine exactly how much money is needed to cover rent, groceries and other necessities, as well as any bills that cannot be eliminated or deferred (such as utilities); she should also reach out to her car loan provider to ask about interest relief, or other options that might lower her payments until she can get back to work. From there, Emily can identify the gap between what’s coming in and how much she needs to live. Once she knows this number, she will be better equipped to make decisions and communicate with her landlord, who may be willing to collaborate on a reduced-payment plan.
“If there are no emergency cash savings, are there any invested savings? If not, we look at [taking on some] debt,” Schieck explains, noting that you should start with the lowest-interest-rate option and borrow as little as possible. “If you have a line of credit, that’s usually the lowest. If the alternative is a credit card at 19.99%, it’s worth talking to your financial institution about client relief programs.”
Speaking more generally, Schieck suggests having a plan for debt repayment before taking on any debt. “If your [regular] income isn’t much higher than CERB, you might not be able to service that debt once you’re working again. Weigh your options: do you want to move [in with your parents] to avoid debt, or do you want to stay in your home at all costs? Is repayment something that’s reasonable and workable?” The answer isn’t the same for everyone, she acknowledges.
Finally, Schieck emphasizes the need to communicate openly with your landlord and cautions against taking on “predatory” credit options such as payday loans.
Andrew Henry is a real estate agent from Burlington, Ont., who owns two income properties as well as the house he resides in with his wife and three kids. As a seasoned landlord, he has an emergency fund to cover temporary vacancies and other expenses related to his income properties. When the pandemic hit, Andrew reached out to his tenants to see if they needed any help (a temporary rent reduction with a repayment plan, for example). Andrew’s tenants have been able to keep up with payments to date, but at least one is precariously employed. Andrew is concerned about what might happen if his tenants lose their income and the impact outlasts his savings. He values good tenants, and would only consider eviction as a last resort.
Advice for landlords on how to cope with COVID-19
Financial planner Liz Schieck is glad to hear that Andrew both proactively reached out to his tenants, and has an emergency fund to draw on while his rental income is reduced. She suggests he keep the lines of communication with his tenants open and think long-term. “Some landlords seem to think they’re immune to the markets going down, but [a rental property is] an investment. There’s no investment aside from cash that is risk-free. Try to think of it the way people are feeling about their RRSP portfolios right now. [Real estate is] just a different type of asset.”
Landlords can be in wildly different positions, Schieck explains. Some are mortgage-free and generate significant revenue from their income properties, while others, like Andrew, are long-term investors with slim profit margins because they are still servicing mortgages on their properties.
When speaking to tenants about their ability to pay rent, she says, landlords should be open about their own situation and try to work together so all parties can minimize financial loss.
If your tenants cannot pay their rent and you don’t have savings to draw from, Schieck suggests the same strategy she recommended to renters. Identify the gap between your current income and minimum outflow, assess borrowing options and repayment plans, then decide what is feasible. In addition to loans and other credit, landlords may also have the option of a low interest home equity line of credit (HELOC) or mortgage deferral, which will accrue additional interest but free up funds in the short term. It’s OK to take on an amount of debt to maintain your investment, as long as you’re able to service payments—after all, this is a business.
While you may have to pass along some of the cost of debt repayment to your tenants later on, Schieck says— “but you have cash flow needs now.”
If the debt load necessary to keep your income property afloat isn’t serviceable in the long run, it may be time to consider selling.
Better days ahead
Going forward, Schieck hopes Canadians will take the opportunity to learn from this hardship and focus on strengthening their finances. “Put in measures to withstand a crisis: an emergency fund or even a line of credit,” she encourages. It’s OK to start small, acknowledging that saving can be difficult due to the high cost of living.
“We can all learn from this, become more adaptable and have some structure in place for if something happens again. We’ll come out on the other side.”
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