Tiana Clewis: Coronavirus is ruining my vacation plans. Okay, they weren't real vacation plans. It was actually a trip with my church to LA that was going to allow our students to actually tour a variety of college campuses, hit the beach and then act like the crazy teenagers they are when we took them to Disneyland.
But thanks to Corona, not only have those plans come to a screeching halt, but we're also out a couple of thousand dollars because the house we rented, isn't giving us a refund.
Now, I'm not here to bad mouth, the property owner, because after having a really honest conversation with them, I actually understand why they're not changing their cancellation policy, like so many others, and giving us the refund. The truth is for the sake of their employees and their family, they just can't. Like so many other property owners, they are in a tight spot right now.
But I bet you're wondering while we're talking about this. We're talking about this because so many of us are actually planning on using real estate and rental properties as part of our wealth building strategy, long-term. Everywhere you look, people are telling you how real estate is one of the best ways to become wealthy... and it's true.
But coronavirus is showing that there are some crazy, hidden risks out there that many of us never considered.
So whether you own rental properties right now, or plan to own them in the future, listen to this tale of a rental property's financial struggles, and the four lessons you can learn to protect your family from the same fate.
Hey Dreamers, welcome back to my channel, where we break down all things money so it can stop being an obstacle and start being what it is: a tool to help you build a life that you truly find worth living.
Before we get into what I'm calling a cautionary tale, let me introduce myself to the newbies in the house. My name is Tiana B. Clewis and I have dedicated my life to helping women entrepreneurs grow their income, dumped debt, overcome their financial frustrations and do it all without sacrificing everything that we consider fun.
Believe me, when I say that you can have a sexy saving safety net and go on vacations at the same time. I've done it and so have my clients.
If you want to join me on this journey, like this video and subscribe to my channel below. Then hit the bell to make sure you're notified every time I drop new money tips and business strategies, every single week that's designed to help you hit your financial goals without living like a nun... unless you're about that life.
All right. So now it's story time.
The tale starts when the decision was made by our church's college coordinators to actually cancel the trip. You see, California schools have been ordered to go virtual for the remainder of the year and coronavirus is not only not slowing down with the heat, it's expected to start picking up speed around the time of our trip. So it was kind of a no brainer decision.
That's when I reached out to the property owner and asked what the appropriate next steps were to cancel our reservation for a refund. With their original cancellation policy, it actually said no refunds, but I knew from reading articles, talking to other canceling vacationers, and even the HomeAway website itself that we used to book this, most of the owners were actually issuing refunds, either partially or fully.
So when I was reminded by the property owner that their cancellation policy said no refunds, so no refund will be issued, I was admittedly shocked. It was a blanket, no refund. There was no partial refund. There wasn't even an offer for a credit for a future booking.
So after I recovered from my shock and checked my ego, I politely asked why they were not modifying their policy in response to COVID-19, especially since they're in such a hard hit state of California, and here's the response that I got:
"Tiana. I may lose all my houses because of this. I'm honoring my contracts and my contractual obligations to all current and future guests. Beyond that, I am not able to offer more. If you purchased trip insurance, you can check with them, although other guests have informed me, they aren't covering this because no one in the U S was actually quarantined, as state to state travel was never banned.
It's hard for others to understand, but I've lost nearly a 100% of my family's income while still trying to pay at least a portion of the salary for my maintenance man and two of my cleaning ladies whose families rely solely on my income. They are wonderful people who have worked with me for six years and they have no other means of earning an income. Any small amount that trickles in goes to them. I've taken out SBA loans and other bridge loans, just to try to make my monthly expenses. I've committed to keeping the houses as STRs until the end of 2020 to honor existing reservations, but beyond that, I may have to pull them and convert to longterm rentals until this passes."
Now the owner goes on to tell me that they do empathize with my situation as something similar happened to them for their own vacation in a house booked. And she mentioned that the booking agency has been refunding the booking fees. So I will likely get at least that much back.
In a later response, after I thanked them for sharing their side of the decision making process and promising to pray for their situation, they did actually promise to give me a big discount, if we rebooked later on when we're ready to try the trip again. That probably should have been in the first email, but maybe they only offered it because I wasn't a jerk about the whole situation. Who knows?
But that's not what we want to focus on here. What I want to focus on is the situation that the owner is currently in. Her honest response revealed some missteps in business strategy and financial management that can be used as lessons for the rest of us.
So what we're going to do right now is we're going to break that down.
When you look at their response, all of those cautionary gyms and lessons are found in the second paragraph and they start right at the first line: "It's hard for others to understand, but I lost nearly a 100% of my family's income."
So here's our first lesson: do not allow your rental properties to be the sole source of income for your family.
One of the primary issues with real estate is that it's heavily impacted by recessions. So whether you're flipping properties, you're brokering property deals, or you are renting them out to vacationers like us, a recession will pretty much always have a negative impact on real estate income.
You see real estate is always about what people are willing to pay for the property or how much they're willing to rent it for. So when cashflow for families and businesses is down well, so is your bottom line.
So, unless you are a multimillionaire who can ride out one or two years of recession because of health- of a health- hefty savings account, having the rental property be your only source of income is super dangerous.
Whether coronavirus had come or not, a recession was eventually going to happen. So the family should have factor that into their plans when dealing with their rental properties.
That's why I recommend that you always have at least one other source of income. My goal is seven. So whether it's an actual job, another business, or even another form of passive income, that's less dependent on the state of the economy, never allow your rental properties to be the sole source of income for your family. As you see here is a dangerous financial place to be in and it can go wrong at any time.
Now let's keep reading to find the second lesson:
"I've lost nearly a 100% of my family's income while still trying to pay at least a portion of the salary for my maintenance man and two of my cleaning ladies whose families rely solely on my income. They are wonderful people who will work for me for six years and they have no other means of earning an income. Any small amount that trickles in goes to them. I've taken out SBA loans and other bridge loans just to try to make my monthly expenses."
Lesson number two: every business needs to have at least three to six months of savings for an emergency.
Like every family, every business has expenses, especially a rental property. They may have a mortgage. You're going to have utilities, cleaning between the renters. You're going to have maintenance of the property. You're going to have property taxes and a bunch of other stuff.
And just like a family, every business is encouraged to have an emergency fund that can keep all of their expenses paid, including payroll, in the event that something happens and they stop making money for a while.
Considering that this property owner has only been able to pay part of their employees' salaries for the four months, since all this began, even with SBA bridge loans, it's highly likely that their emergency fund either didn't exist over was severely underfunded.
So to avoid being in the same situation, a rental property owner should save a percentage of their rental income each month in a savings account. You can set it aside for emergency funds, for repairs, and even future expansion. The most commonly recommended percentage is 10%. It's small enough that it's not going to have an impact on your day to day operations, but it's big enough that you'll have some steady growth from that.
Our third lesson comes from the same set of facts. They need to pay their maintenance man and two maids, who've worked with them for six years as employees.
Now, when it comes to rental properties, there's already a ton of potential expenses that you can have. And I've told you they're rent- utilities, property taxes, property insurance, and there's nothing you can do about them. Those expenses stay around no matter what you do or what the recession looks like. And so the last thing you want to do is add more "must pay" expenses when- with employees, when you could have used contractors.
That's why lesson number four is to use contract labor whenever you can.
The use of contract labor is a system that gives you the freedom to stop paying the person when you no longer need their services. And it also allows them to freedom to ethically take on similar jobs with other individuals or businesses.
It's no different... think of it like the lawn guy. So, the lawn guy, you contract with someone to cut your grass. If you don't need someone to cut the grass, you stop calling them. And you can stop calling them and not feel guilty because they're not making money just from you, they have other sources of income.
So let's say that if they had a maintenance man who was running his own company and they contracted with the company so that they pay for services rendered. Well, now that they have fewer renters, they probably need less maintenance, and since they now need less maintenance, that's less services. And now their expenses have gone down cause they're paying him less.
Same for the maids. Fewer renters equals fewer cleanings. So if they contracted with a cleaning company, then they're spending less money.
That's why I'm saying when you're looking for a maintenance man, you're looking for cleaning ladies, looking for a lawn guy, do what you can to find someone with a business who's providing the services. And then you get a contract with them based on services for injured. And now you've saved yourself the hassle of being obligated to pay employees, to do the same work, when a recession causes you to have a slowdown that jacks up your income.
So there you go: use contract labor whenever you can.
Alright. On to lesson number four. The response continues on saying:
"I've committed to keeping the house as STRs until the end of 2020 to honor existing reservations. But beyond that, I may have to pull them and convert them to long-term rentals until this passes."
So lesson number four is that if you own multiple properties, diversify your risk by having a mix of long-term and short term rental.
I believe in teeth- in treating your rental properties, like you do an investment account. You don't want all your eggs in one basket. You want a mixture of low risk, but low yield investments to balance out the risks associated with the high yield, high risk investments. So in this case, she's focused on the high risk, high yield of short term rentals.
From a purely math standpoint, short term rentals are downright sexy because when you have an eight bedroom house that can sleep 20 plus people, would you rather rent it out for $8,000 a month for a single year, or would you rather rent it out for $1,200 bucks a night?
If you rent that property out for 10 days out of the month, you've already made $4,000 more per month than you would with a long-term rental.
Here's the thing though, that one year tenant has a legal obligation to pay you that $8,000 a month, no matter what happens, global pandemic economic recession included. The tourists, on the other hand, like us, we just simply don't have to book your house.
But even during a normal reception- recession, no pandemic, you at least have that one tenant locked in at $8,000 a month. But with your short term rentals, you may be forced to severely drop the price because you now have a smaller pool of tourists and you're competing with people who also have empty houses to rent.
For that reason, my recommendation is to have at least a portion of your multiple properties designated as long-term rentals. Then if something happens and you're not making as much money on your short term rentals, then at least you can use the income from the long-term rental to offset what's currently going on and stretch that emergency fund.
I must say, it's amazing how much you can learn when you simply ask questions. Right? This property owner super honest response is- has not only earned them yet another ally in prayer, but it's provided a cautionary case study for the rest of us. So thanks homeowner for sharing your reality with me.
Now that we've walked through these lessons, which one caught you by surprise. Now I'm betting them most of you had never even considered lesson number four, about the mix of long-term and short term rental properties, but I really want to know. I'm curious. Let me know in the comments, which one caught you by surprise.
Now that you have this cautionary tale to help you on your journey to owning a rental property, let's get connected on social media. You can find me on Instagram and Twitter with the handle tianabclewis or on Facebook with selahfinancialcoaching... cause you know, Facebook, they're kind of difficult.
Also, let me know that you found this video useful by hitting that thumbs up below and subscribing to my channel. Don't forget to hit the bell so that you're notified every time I dropped new money tips and business strategies each week, just like this one.
Finally, if you're looking for more information that will help you avoid becoming a small business cautionary tale of your own, these two videos right here will help you stay out of at least some of the foolishness.
With that, I'll see you next week. Bye bye.
Real estate investing is a popular way of building wealth and vacation homes provide steady passive income for many! But what happens when income from your short term rental property slows down? Today, Tiana B. Clewis has a case study of a vacation rental property owner who could use with some financial advice, because their money management has left them in a total financial bind!
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