How Can Apartment Businesses Survive or Mitigate the Challenges of Economic Downturns?
In a continuing period of economic instability, property rental businesses must take advantage of every avenue that can help them remain solvent.
Operating a property rental business during a pandemic and economic downturn double whammy is one of the worst scenarios business owners can be in. There is uncertainty as to the collection of rent from tenants. It is also possible for many tenants to leave, as they can no longer afford to pay the rent unless they get a government subsidy, which will only be there for a limited period.
So what can businesses do to make the most out of the dire situation? Can businesses involved in the rental of apartments, residences, or other real estate properties survive the difficulties brought about by a major disturbance in the economy?
The good news is that there are ways to stretch resources and profitability while mitigating risks and adverse outcomes in the rental market. Here’s a rundown of what businesses can do to avoid suffering massive losses or completely going bankrupt.
Enforce a renters insurance requirement
Unless there are specific local laws that prevent a business from doing it, it is legal for apartment or rental home owners to require new tenants to obtain renters insurance. This insurance provides most of the benefits of a homeowner’s insurance except for dwelling and structure coverage.
This insurance mostly protects the tenants, but it also indirectly affords some degree of protection for the property owner. With renters insurance, landowners can be sure that they will be obliged to worry about the welfare of tenants in case an accident happens. Even in the case of man-made incidents like fires started by the tenant’s children, the insurance can pay for the possible damage.
Unless there are specific local laws that prevent a business from doing it, it is legal for apartment or rental home owners to require new tenants to obtain renters insurance.
Apartment owners can go after tenants for damages they cause to a property, but it would be better to have renters insurance cover for everything. In the economic situation the world is facing now, there is a high likelihood that tenants will be unable to pay for damages. Many are even having a hard time paying their rent. It is advisable to learn all you can about renters insurance coverage.
Get business property insurance
As a rule of thumb, every business should sign up for business property insurance. This is an insurance plan intended to compensate for the damage to or loss of properties used in the operation of a business.
Business property insurance can provide the cash necessary for a business to resume operations as soon as possible. Not all property insurance plans provide the same coverage, so it is crucial to carefully look at the terms and conditions. Most policies only cover a certain percentage of the insured property’s market value.
Also, there are specific cases that are not covered. Negligence or the violation of building codes, for example, can be used as grounds by insurers to avoid providing compensation. Regular property wear and tear are also not covered by this kind of insurance.
Moreover, some insurance companies only provide certain coverages if the insurance holder pays for add-ons. Businesses should be mindful of this, as it is quite common and largely acceptable for insurance companies to run ads that may be misinterpreted by consumers.
Make use of the LLC protection
Many apartment and rental property owners operate their business as sole proprietors or individual business owners. This can be disadvantageous in the face of major problems. That’s why some legal experts advise rental property owners to make their businesses LLCs or limited liability corporations.
LLCs protect business owners from liabilities that may arise from the operation of a business. An LLC company, an artificial entity, becomes the sole party answerable to liabilities that may be incurred in the course of business activity. As such, only the assets of the LLC are exhausted to pay for liabilities or claims for damages. The individual business owners will not be legally compelled to cover all liabilities.
LLCs protect business owners from liabilities that may arise from the operation of a business.
Additionally, it is possible to take advantage of pass-through taxation. According to Legal Nature, this means that the LLC does not pay the taxes. Instead, taxes become the responsibility of the business owner. This gets rid of the double taxation instances for single-member LLCs, wherein the business is taxed as if it were a sole proprietorship.
However, there are some intricacies involved in going with the LLC option. It is advisable to consult a corporate law specialist to be acquainted with the pros and cons as well as the process and requirements.
Be in close communication with tenants
Treat tenants well to avoid losing them. When the economic tumbles, it is only logical for many to look for ways to reduce their expenses. Many will likely move to smaller apartments to save on their recurring expenses.
Avoid losing good-paying tenants by communicating with them to address problems they may have with the property. It is also not a bad business decision to strike short-term compromises to help them get through the economic hurdles. It can be a temporary reduction in the rent amount or the limited deferral of payments.
It would be better to keep tenants with good track records than to find new ones, who will likely end up defaulting on their obligations because of the prevailing economic situation. Besides, it will be very difficult to find new tenants when there is a recession or some other similar condition.
Seek government assistance
There are many government programs designed to help small businesses survive during an economic crunch. These include the Economic Injury Disaster Loan (EIDL), Paycheck Protection Program (PPP), and other programs administered by the Small Business Association (SBA). These can provide valuable support to businesses while the economy is still in bad shape.
There is a reason why people and businesses pay taxes. The government is expected to provide assistance when times get rough. However, do not expect the government to cover everything. It would be wise to exert all the effort to avail of government aid programs, but it is preferable to plan things as if no aid is expected.
The still ongoing COVID-19 pandemic should have taught businesses that nothing is predictable and consistent. Serious tumultuous situations can happen without any warning, so it is a must to be ready and to have contingency plans for various possible challenges.