How Can Landlords Prepare for Another Pandemic Shutdown?
These past coronavirus-filled months have been extraordinarily difficult for most landlords. Though way back in March, President Trump expressed positivity that we’d get over this pandemic “quickly,” in reality, nobody knows how long this will last. Many landlords weren’t prepared for the pandemic shut down and didn’t have reserves or financial planning in place to continue paying mortgages, and covering missing/late rents, on top of their other expenses. We’ve also seen uncertainty in the housing market that may have changed many investors’ plans for building their rental portfolio.
The US is now 80-90% back to normal, but while we were caught unawares by the unexpected onset of COVID-19, it’s not too late to prepare for the next pandemic shutdown. Emergencies will happen in the future – so what can you do now to be ready?
Leveraging your equity is a powerful investment tool during peak housing market conditions, as it allows you to grow your portfolio quicker, but it can be very detrimental during a crisis. Many landlords who were over-leveraged at the beginning of the 2008 housing crisis lost everything when the market crashed. At the moment, people are still buying houses, but with unemployment still relatively high, a crisis could be looming around the corner – are you ready for the market fluctuations that could follow?
Paying off your mortgage early would put you in a better position than refinancing to get cash out of your home if another recession were to hit. You should also look at your portfolio and try to make sure that you have a mix of different types of investments & property types to help absorb any dips in the market. Can you pay your mortgages with a lower rental income?
2. Set aside Emergency Funds
Your goal should be having at least 3-6 months’ worth of emergency funds to give you a significant cushion in your real estate business for use in times of crisis. This should help you stay afloat through another pandemic shutdown or recession. The value might vary per class, but it’s usually based on the value of the home (the neighborhood, type of property, number of units, the level of risk you want to prepare for, etc.). Keep this fund in its own bank account and protect it at all costs, rebuilding it as fast as possible whenever it goes below the minimum threshold.
But what if it goes beyond six months, maybe even two years? Is it even possible to build a fund large enough to withstand years of pandemic/recession, and how long would it take you to do this?
3. Optimize Digital Processes
Be prepared to operate online by automating or digitizing your processes. The coronavirus pandemic is accelerating the Fourth Industrial Revolution, forcing industries to adapt to digital or be left behind, and the rental industry is no exception. People who manage their properties using a paper-based system or have to visit properties in person were much more seriously affected by coronavirus than those who already had online systems in place.
Here are some digital tools landlords can use to help smooth out the transition from offline to online if another pandemic shutdown is announced:
Automate Payments & Processes
-There are plenty of online platforms, like Avail, Clear now, and Cozy, which landlords can use to keep track of everything from when utility bills are due to setting up automatic direct debits from tenants. You can also use a CRM system, like Hubspot or MailChimp, to send auto-reminders to tenants about payments and updates during a crisis, and get alerts whenever they’re late to reply. This kind of proactive communication will help you stay on top of your portfolio and make sure all tenants are on the same page in times of crisis.
Having your documents, like your lease, property title, deed, and tax documents, digitized and backed up to a cloud (like Google or Stessa) makes it easy for you to securely move them around when you need to – even while in quarantine.
Use tools like DocuSign and HelloSign that allow you and tenants to sign leases, acknowledgment slips, and other important documents with e-signatures (then store all documents in an easily-accessible online portal).
Virtual tours are safe, efficient, and have become an expected alternative to visiting homes in person. Prioritize digitizing your tours with tools like Concept 3D, EyeSpy360, Matterport, etc. to continue showings online when people are stuck at home.
4. Determine Your Bottom line
In the event of another recession or pandemic shutdown, what kind of payment plan can you afford to offer your tenants? Look at your gross profit margin percentage per rental to know how much rent you can afford to miss out on without going negative, then develop a plan ahead of time for what kind of arrangement you can afford to offer tenants. You should also consider:
Your emergency bottom line should cover your operating expenses, and avoid triggering a default and other lender protections in your mortgage.
Rent Deferral Agreement
-Record any rent deferrals in a lease modification or forbearance agreement document. It should clearly state that it’s a deferral of rent, not an abatement, to be paid over a predetermined period. Request additional information on your tenants’ current finances, too, to make sure that they can deliver within the agreed timeframe.
5. Work with a Great PMC
When screening a property management company and they don’t offer online access to important documents or were unable to provide essential services during the lockdown because they couldn’t operate fully online, now might be a good time to consider finding one that does.
Some PMCs were completely crippled by not being able to go to their office to access important information, while others were able to continue operations relatively smoothly to a remote work setting. When you’re screening for a recession-ready PMC, make sure they have all documents digitized and available for owners to access via an online portal, a proactive system for communicating with tenants and landlords, and a meticulous rent collection process.
For those who self-managed during the pandemic shutdown, ask yourself if you’re prepared to go through another year (or two) like this. Tenant issues, missed rents, and evictions are a landlord’s worst nightmare in the best of times, but COVID-19 has made these problems even more emotional and stressful. You shouldn’t have to feel guilty about running your business, and working with a good property manager will allow you to remove any personal feelings from the equation in dire times.
The next crisis could be just as sudden and unexpected as this pandemic was, so be prepared before it gets here! Avoid over-leveraging, have an emergency fund, digitally optimize your processes, determine your bottom line, and work with a digital-ready PMC to ensure rental business continuity in any economic environment. The pandemic has been a hugely stressful time for landlords across the country, but if you follow these tips, you’ll be able to sleep a little easier the next time disaster strikes, knowing that you’re ready for whatever the world can throw at you.
What would have helped you be better prepared for this pandemic?
Image Courtesy of Jeffrey Czum