We had it all planned out. Little Mermaid was bought, renovated, and rented within less than 3 weeks of purchasing it, the rehab of the duplexes was finally completed and all units were rented. We were just about ready to begin the refinance process, then COVID happened and it started going downhill real quick. This is why they say, plan for the unexpected.
The lenders we had secured backed out on lending, the tenants we had just moved in lost their job and things were not looking great.
How COVID affected our Property Financing Process
If you read the individual posts for our property purchases, you know that we purchased our properties with 100% financing via personal loans and high-interest mortgages.
In March, we were in the middle of refinancing Little Mermaid and the Duplexes so that we could pay off the personal loans.
The loan payments for these loans were $3,000 per month.
Without being able to refinance, we were stuck with these payments in addition to the mortgage payments.
Every day that we couldn’t refinance meant that our return on investment was diminishing, but we didn’t give up.
We had to change our approach, get creative and settle for less than we initially wanted.
It was not until June that we were able to finalize the refinance process.
Managing Tenants During the Pandemic
At first, it was just one tenant not paying, then there were two and eventually three. This meant that only 50% of our tenants were not paying.
In July, we received a call from our Little Mermaid tenant that he had lost his job and was moving out. This was just 3 months after moving in.
In August, we had one vacant unit and three non-paying tenants.
Fortunately, we were able to re-rent Little Mermaid within 3 weeks and two of the tenants began catching up.
We still have one tenant that hasn’t paid and unfortunately will likely not pay because he is incarcerated for domestic violence (a story for another day). Our hands are tied because of the COVID eviction restrictions, so we are working on helping the family get financial assistance.
How the Pandemic Affected Our Finances
After freaking out (as usual of me), we had to come up with a plan. Reducing our household expenses became our priority which led to the acceleration of our move to Georgia.
We hoarded all the cash we could and used lines of credit to cover property expenses until we could refinance.
We were not able to get Forbearance for our home mortgage because that would negatively impact our refinancing changes, however, we were able to skip a payment for the personal loans.
We rented out our Deerfield house and luckily got paid 3 months in advance which was a huge temporary relief.
When we moved to Georgia, we were able to skip June’s mortgage, and then when the duplexes were refinanced in mid-June, we were able to breathe a little as it paid off a couple of the personal loans and lines of credits.
The Impact of COVID on Our Profits
As you would imagine, if tenants are not paying, we are technically losing money. Fortunately, when it comes to evaluating deals I am very conservative and plan for the worst-case scenario. If the numbers still work, then it’s a deal worth pursuing.
My concern wasn’t so much about our profit losses, but about our ability to pay for all of our obligations if all tenants decided to stop paying. We didn’t and still don’t have that much cash to cover all property expenses. Fortunately, we were able to manage with the partial rents we did receive.
As of the time of this post, we are just reaching a more stable point and I can finally breathe (at least temporarily). Except for that one tenant, all others are paying, but not necessarily on time.
While we are not banking on lots of money, the properties are currently covering for their expenses which is all that matters at this time. If the property can pay for its mortgage and utilities, we are still making money in our book. We may not be cash flowing much, but the loan principal is getting paid by the tenants.
This situation sucks, but we can’t do much about it. All we can do is hope that this passes soon and we go back to normal.
However, note that this didn’t stop us from continuing investing, hence the purchase and renovation of Big Horn. We cannot let this one event ruin all of it for us.
Real Estate is a long-term game and we are all in!
5 Lessons the Pandemic Thought Us
- Having cash reserves available to cover unexpected events is a must-have.
- Being conservative when analyzing deals so that when a situation like COVID hits, you are not as concerned about profits.
- Being more proactive from day one to try to get rental assistance for tenants.
- Having a more strict tenant screening process is key. Good tenants will make every effort to pay their rent.
- Having a low expense ratio helps in situations where more of your money needs to be allocated to investments
Let’s hope for the best 🙂
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