Understanding the Relationship Between Rent Loss and Delinquency

Posted by: TheGuarantors on June 3, 2020

Over the last two months, we’ve watched COVID-19 wreck havoc on jobs, businesses, and virtually all aspects of daily life. 25% of households shared they would have difficulty paying their rent and one in four Americans planned to use their CARES act stimulus check to cover housing costs. As funds are depleted and jobless claims surpass 40 million (an additional 14 million from April 23), landlords can expect rent payments to continue to take a hard hit.

As the situation evolves, the industry is closely tracking rent payments, rent strikes, and eviction moratoriums. On May 1st, a survey conducted by Property Nest found that 44% of renters said they would struggle to make May rent. Last week however, the National Multifamily Housing Council rent tracker showed that 90.8% of renters had actually paid May rent. In NYC where rents are notoriously higher, The Real Deal reported that 25% of renters didn’t pay

Like many, we’ve kept a close eye on rent payment trackers as well as our own data. So how do we all sort through the noise and use this information to guide business decisions? 

Understanding the Data

To start we need a benchmark to compare COVID related survey data against. We used a sample cohort of 10,000 renters. As many of the surveys have focused on economically at risk households, we chose renters with a higher risk profile. Analysis revealed the following relationship: 

DefaultRatesGivenDelinquency

  • When a tenant is 1-month delinquent, they have an 8% chance of defaulting on their lease
  • When a tenant is 2-months delinquent in succession, they have a 27% chance of defaulting on their lease
  • When a tenant is 3-months or more delinquent in succession, their chance of default is more than 50%

Historical data shows these numbers hold steady across seasons, and are representative of renter default in multiple years (with any potential impact from COVID-19 specifically yet to be seen).  

At TheGuarantors, we see the 3 month mark as most significant because renters who are delinquent are now more likely to default, than not default, on their lease. Though we monitor and are in contact with renters from the first sign they are delinquent, we focus our Risk Mitigation efforts on this segment to drive the biggest value for our landlord partners. 

How This Helps with Understanding Rent Loss and Delinquency

As you digest the news and look at your own portfolio, we’ve outlined a few questions to ask that will help you further contextualize what these numbers mean.

  • What are the maximum delinquencies in your portfolio and how will they translate into defaults?
    • This may help you with budgeting for lost rent 
  • How are you allocating resources for rent collection? 
    • If staffing is difficult (as we all experience at the moment), how can you optimize collection outreach?
  • How are you handling lease break requests
    • For example, if a tenant is 4 months behind on rent, they have a 76% chance of defaulting on their lease. It may be a better idea to let them out of their lease and set up a payment plan to recoup as much loss as possible, instead of requiring them to stay in the lease

Risk mitigation is only one part of TheGuarantors holistic approach, which can start with our rent protection and add-on damage protection. If we can help you navigate and prepare for the summer season, please reach out using the form below and keep your eyes peeled for our own May rent delinquency analysis in the coming days.