Avoid Overextending Yourself Financially in your Hosting/Real Estate Business

As this unprecedented global pandemic descends upon us, it’s accompanied by  a vast and unprecedented economic calamity.  Some businesses will see much more of a devastating hit than others, and those businesses which rely upon air travel, tourism, short term rentals, or are connected with the hospitality or service industries, will be particularly hard-hit.  This includes vacation rentals and short term rentals and Airbnb hosting.

The losses we are seeing now, shine a light on an issue that I’ve been concerned about for some time, which is my observation that many property owners, once they amass a certain amount of capital, seem too eager to reinvest those funds into additional properties, and “put my money to work for me.”  I think what we are seeing now demonstrates that if you send your money out to work for you, your money might get laid off and fail in the task which you sent it out to do.  Your money might disappear.

There are 5 people I’ve known personally who have lost their homes in foreclosure over the last dozen years or so, and each was a terrible tragedy.  None of these losses was inevitable: they could all have been avoided with more financial prudence.

In one case (#1), during the 2008 recession, a neighbor couple who owned two houses was having financial problems.  They sold one house, but somehow still could not pay their bills.  I suggested that they get a roommate or two, as they had space for this.  “I wont’ have someone messing up my kitchen”, one of them countered.  Well, soon enough they had no kitchen, as the bank foreclosed upon their home. Foreclosure

In another case (#2), a friend who owned his house outright, refinanced and took out a mortgage on his house so he would have some cash.  He made foolish decisions with his expenditures, and within a year he lost his home.  He then began living in a van.

In two other cases (#3 and #4), two acquaintances who both owned their homes outright, (million-dollar homes in the San Francisco Bay Area) wanted some extra cash, so they refinanced their homes and took out a mortgage. Unbeknownst to them, the lender they were both working with, had a history of engaging in mortgage fraud.  According to their statements, they paid the mortgages they owed in a timely way, but the lender claimed they had not paid, and foreclosed on both their homes.  One of these friends became extremely distraught and never recovered, and died of a heart attack a couple years later.  The other ended up homeless, living in his car, until he moved to Ohio and obtained Section 8 subsidized housing and now lives on welfare in that area.  mortgage fraud

The 5th property owner (#5) owned a rental home in Berkeley.  She did not choose her tenants wisely, ended up with entitled and hostile tenants, foolishly got involved in a heated argument with them, at which point they contacted the city and complained of code violations.  The city shut her down, refused to allow her to rent out her property until a few issues were resolved that could have been fixed without much expense.  But she was unable to get the tenants, now refusing to pay any rent, out of her home in a timely way, and with the loss in rental income, she became unable to pay her mortgage, and lost the home in foreclosure.

Now, during this pandemic, I’ve read accounts of a number of hosts (#6) who fear losing their properties if they have no income for a few months and are unable to pay their bills.  It’s my hope that government relief will come in to forestall that, but even so, these individuals are revealing that they are operating without enough of a cushion of savings.

The problem that all of these people had, was either that they didn’t actually have enough savings or enough of a cushion for the situation they were in (#5, #6) , or that they mistakenly expected things to turn around and their income to be back to normal soon (#1), or that they borrowed/overextended themselves too much, or from the wrong lender (#2, 3 and 4) to accomplish their goals.

There’s a drive in many Airbnb hosts that I’ve seen, and which I feel quite uneasy about, to not be content with a modest business, but to want to buy more and more, and to build “empires”.  Building a bigger business isn’t necessarily a bad thing, but it should not be done out of an unexamined ego-driven urge to just get more and more stuff,  and more and more income.  I think too many of us are unthinkingly propelled by an urge to get more and more, while the things that are of real lasting value in life — relationships with our friends and families, spiritual practices, fulfilling hobbies and all that brings us joy in life — ends up pushed to the side.  No, building your business bigger and bigger is not in and of itself of any value at all.  When we get to the Afterlife, aka “Heaven”, how much money we made and how much stuff we had, will be of no relevance whatsoever, in relation to our Eternal Soul.  Rather, with the perspective that we gain once we are there where all truth is revealed, we will realize we’ve been incredibly stupid if that’s all that we focused on in life.  Let this instance of a global pandemic help put these matters into perspective.

Let’s be content with a modest income and a modest lifestyle, and be happy that we have enough.

Let me tell you a story about my own situation which illustrates how I assess decisions about whether or not to grow a business.
I own one house, my own house, and rent rooms in my house to Airbnb guests. So this is quite a modest business.   Though on paper I could afford to buy a second home and do the same in another house, my own sense of this is that such an investment would be too risky for me as (1) it would take too much of my savings to get started, (2) properties in my area (SF Bay Area) are so high priced in relation to potential rental income one could bring in for them, that only unusually low-priced homes would make sense to use for this purpose, and those are in scarce supply or not near enough to where I live to be practical for me to run.  Eg, if you buy a home for which the monthly operating costs are $3000 to $4000, and you can only expect to bring in $3500 to $4500 a month income at the most via rental income, then this is not a viable business model.

At one point my parents, proud of the rental business I’d created within my own house, offered to help me buy a 2nd home to expand my business.  I still felt uneasy about this. I would still need to put a significant amount of my own money into the pot, and devote a lot of time, energy and finances to this additional house, particularly if it were a more affordable “fixer-upper”.   I did not really see the point of this, when as things were, I was living modestly but comfortably already.  I worked, but had sufficient free time now to do the things I liked to do, which was really important, as the things I liked most and which gave most value to my life, were not related to my paid work or my rental business.  As I saw it, if I bought another house, I’d have much less free time, so much less of my life would be oriented to doing the things I most enjoyed doing.  I’d end up being a slave to my business, locked up in “golden handcuffs”, rather than having a business which supported me to live the life I wanted to have.  golden handcuffs 2

As well, I think one clear lesson of this pandemic, is the value of having adequate cash savings.  Not assets, not properties, not stock or mutual funds investments, but actual plain old cash.  Some people are pretty good at figuring out the best options for investments that will provide a decent return, but I’ve not been so successful at investment.  I tried investing a rather small amount in two different “standard” investment options, and lost funds in both situations.  Given that I’m also a low-risk person generally, it just began to seem a lot more sensible to leave money in the bank rather than risk losing funds in the hopes of a good return.

Having enough savings to be able to go 3 to 4 months or longer, without any income, would provide a lot of protection now from stress and panic.  Many hosts are anxious that they will lose one or more properties or perhaps even their own home, during the economic tsunami that is hitting us now.  Few people in my opinion have enough savings.  I have a friend who is a homeowner, and is over 70 years old, but he cannot retire because he has no savings.  He goes to work every week, (by bus, since he has no car and doesn’t drive) and lives virtually paycheck to paycheck.  He literally does not have enough money to tide him over should he come down with an illness that requires him to stay at home for a month.  Yet he’s spent a lot of money on foolish things: building an elaborate treehouse in his yard, building a large greenhouse, adding solar panels to his home, buying lots of cute patio furniture and garden decorations that he doesn’t really need.  At one point, in order to obtain more cash to spend in more foolish ways, he refinanced his home and now pays an even higher mortgage than previously.  I’ve urged him to take in one or two roommates so he would have some additional income in case he can’t work, but he’s refused, as he enjoys living alone.  When a shelter-in-place was announced in my area, he was angry and insisted he had to go to work because “who’s going to pay the bills?” a question which he fails to see the irony in, since as he ages, it’s less likely he will be able to continue doing the work he is doing and pay his own bills.

There’s a lot of value in being able to see “the big picture” and look beyond the present moment, and in having sufficient imagination to understand that things might not always be the way they are at present.
Even in ordinary times, the vacation rental and short term rental business is built on unstable ground, as STR regulations have been lacking in many areas, and new regulations have continually been passed which prohibit doing this business in many places.  The result of that has been that many vacation rental and STR owners have ended up operating illegally, which is certainly a very risky way to do business.  Vacation rentals are oriented to those with disposable income, who can afford vacations and trips, and in times of financial downturn, there are fewer such people.

All in all, I would encourage people to be content with a modest income and avoid feeling compelled to “build an Airbnb empire.”  You don’t need an empire: what you do need is time in your life to pursue those activities and passions which bring deep meaning and contentment to your life.  Making more and more money is not this.

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