Treasury Secretary Paulson finally admitted what most people have known for some time. Speaking to the Council of Institutional Investors in Washington, D.C. he remarked that the US economy ‘has turned down sharply’. So much for the preemptive nature of treasury forecasting!The remarks came amidst a week when central banks around the world made little headway in easing pressure on the dollar with just a 0.25% cut in base rates by the Bank of England. Meetings this week between delegates from the Federal Reserve and the European Central Bank whilst focussed on injecting liquidity into the markets, will undoubtedly turn to some discussion on the strength of the Euro, which has helped force the rise in oil price that has so adversely affected US households and stifled the spending that was the backbone of the economy.
The ongoing mortgage crisis seems almost ‘old news’ these days, but with millions of sub-prime mortgage companies resetting interest rates shortly, the ability to meet repayments is still the main focus for many homeowners. This is never more so important than for investors who have rental accommodation.
One of the hardest sectors hit in a recession apart from the homeowner market is the rental sector. The ability of tenants to make their rental payments can seriously affect the liquidity of an investment project. Whilst all the news is focussed on the plight of the homeowner, there is little sympathy, or coverage, for the individual who has invested their hard earned money into investment property for rental. For many of these investors, their property purchase has been geared with a mortgage and it is the rental income that allows the investor to make the mortgage payments on the property. If a tenant starts to default on his or her rent, then it is the investor who has the problem in meeting the financial commitment against the property to the mortgage lender.
This problem can be most evident in small rented units. In these two or three family units it is normal to find that the owners of the property are not large corporations, but are more likely to be first or second time investors setting out on their first forays into private investment opportunity. It is these ‘everyday’ people who are also most likely to suffer when defaults on rental income make meeting the mortgage repayments difficult. There is less to fall back on, and eventually the investment property will become just another statistic in home repossessions with the investor not only losing his original capital, but also at risk to his other personal assets, which may have to meet any shortfall from a forced sale by the lender.
It is this section of the rental market that also suffers most from inadequate tenant screening. Small investors are less likely to screen tenants and obtain sufficient credit inquiries. When the economy is vibrant this burden of credit worthiness is often bypassed by the individual investor. Renters in stable employment can often be the only checks that a landlord may make. A recession however, puts even the security of employment to the test and it is now that new tenants, and also existing tenants in a position to renew an existing rental contract, should be screened to ensure that they will be in a position to maintain their rental commitment. It may only take one defaulter in a small three or four family unit to put the whole viability of the investment at risk.
Recessions are by nature a time of financial burden and all possible steps should be taken to secure that the least risk is taken when securing the financial liquidity of an investment project. It may seem harsh to tighten the financial screws on existing tenants, but forewarned is forearmed, and ultimately it will be the investor that that will suffer along with all his financially secure tenants if a defaulting tenant puts the property into foreclosure. A situation that may easily have been avoided with adequate renter screening.
About the Author
Tenant Report is a credit check company dealing in obtaining rental screening
