The landlord-tenant relationship is one of the few situations where both sides have leverage, and both sides have power. The tenant owes rent, of course, but they are also owed service, responsiveness, and decent living conditions. California law allows tenants to withhold rent if the property is not up to code. This can spell deep trouble for some landlords, particularly if you depend on a single property for your income. It then becomes a Catch-22. It’s hard to make needed repairs in case of an accident or disaster without the rental income, but you can’t get the income without first making the repairs. One way to avoid losing your rental income is to secure cash out refinancing to finance much-needed improvements to your rental property. This keeps your tenants paying their rent and your investment income flowing.
When a Renter Can Withhold Rent
There are numerous instances where California allows renters to withhold paying rent to their landlords legally.1 If you’re a landlord, you probably know a tenant can withhold rent when there are serious defects to the property that endanger the inhabitants or breach the “implied warranty of habitability.” Breaches include:
- Collapse and/or non-repair of ceilings or foundational walls
- Vermin and/or insect infestation
- No heat
- Blocked plumbing
- Illegally installed and dangerous appliances
- Illegally installed electrical wiring
- Serious code violations
Naturally, the damages cannot have been caused by the tenant. If they are, the tenant cannot withhold the rent. If they aren’t, the tenant can withhold rent until the repairs are made, making it very hard on the landlord who relies upon rental income to keep the building maintained. It’s a vicious cycle than can continue perpetually unless something is done.
But It’s Not My Fault!
These laws were put into place to protect tenants from absentee slumlords, not typical landlords. Damages can occur, however, and still require repair. Imagine a scenario where you have already hired a contractor to perform some needed repairs to your rental property. You paid the contractor, but the work he performed was shoddy and failed inspection. To make matters worse, the contractor is nowhere to be found. He took off with your money and you’re left with an uninhabitable residence and some very angry tenants.
In a case like this, your only recourse to recover the lost funds might be to file a series of claims against surety bonds and insurance companies. This will take a long time, particularly if the matter has to go to court. You’ve already paid for the repairs, you don’t have the additional funds to have the work done again…and now your tenants are refusing to pay rent, so you’ve lost your source of income on this property. What can you do?
How the Cash Out Refi Can Help
In cases such as this one, you must get your income property back to earning you income—that’s the priority. One solution is to borrow against the apartment unit. Cash out refinance loans enable people to borrow against the equity of their existing property; they refinance existing mortgages at a higher rate so the owner can collect the difference between the two loans in cash.
There are many benefits associated with cash out refi loans, and in our example, the primary benefit is you will receive the cash you need to make the necessary repairs to the rental property and get your tenants paying their rent again. This restores your source of income, which you can then use to pay off the refinance loan.
It’s also good to think about how a cash out refi can increase the overall value of the property’s mortgage. If the property is assessed as more valuable, you can get more money for it down the road when you are ready to sell. In fact, if there’s enough money left over after needed repairs are made, why not improve upon the property? This increases the property’s value and ultimately the amount you can charge monthly for rent.
When the Property Value is Too Low
If your property needs repairs and you are still “upside-down” in the mortgage, however, there is a possibility that a traditional lender will not assess it high enough to offer a refinance loan. Don’t lose hope! You are not without options at this point. Rather, look for specialized lenders like Socotra Capital that are willing work with you and get you the money you need. Some lenders may also offer you the option of leveraging all your commercial property against the loan on a specific building, not just the building in question. This means you can secure the additional income you need even if the equity in the building requiring repair doesn’t cover all of the necessary construction costs. While it can be hard to find lenders in corporate banks willing to do this, we offer this flexibility at Socotra Capital. Helping real estate investors is our forte, and we see more cash out refinance loans than most lenders.
Socotra Capital’s experience is second-to-none in helping real estate investors secure the necessary financing to keep their rental property income flowing. We focus on equity-based financing, so your credit isn’t an issue even if it’s bad. You need to keep your rental renter-friendly, and you need cash to do it. Visit our website and see how easy it is to obtain cash out refinancing that you can use to improve your tenant property.
- California Department of Consumer Affairs, “Having Repairs Made,” http://www.dca.ca.gov/publications/landlordbook/repairs.shtml ↩