On today’s show we’re talking about the challenges that many property owners will be facing during this unprecedented time in modern history.
We don’t know if the Covid-19 crisis is merely a blizzard or an entire winter. Depending on the answer to that question, the extent of the economic damage can vary widely. Most people can survive an economic blizzard. Things slow down for a few days. Everyone gets their shovels out and digs out. A few days later life is back to normal. In an economic winter, a different approach is required.
Today’s discussion is a microcosm of the hundreds of similar situations that are happening in industries all over the world. If you’re in the restaurant business, if you’re a taxi driver, if you’re an airline pilot or flight attendant. Hundreds of millions of people are being directly affected economically by the current outbreak. The real estate example we’re focusing on today is short term rental properties.
I’m an owner of a portfolio of properties in the Rocky Mountains. A current search shows over 300 listings available for next week. Normally at this time of year, we’re running about 80%-90% occupancy.
This past weekend, AirBnB changed its extenuating circumstances cancellation policy. This policy over-rides the policy that each AirBnB host lists for their properties.
We have seen a flurry of cancellations over the past three days. In many of those cancellations, guests have been making false claims in order to qualify for a full refund. The AirBnB policy says:
“We may be able to give you a refund or waive the cancellation penalties if you have to cancel because of an unexpected circumstance that’s out of your control. Below is a list of circumstances covered by our Extenuating Circumstances Policy. Before you cancel, check that your circumstance is included in the list below and that you can provide the required documentation.”
- Unexpected serious illness or injury
- Government-mandated obligations
- Transportation disruptions
- Travel restrictions
- Epidemic disease or illness
In my case, my properties are not in a location that has identified any Covid-19 cases. As such, unless the guest is unable to get to the location due to, say, a flight cancellation, they would only be entitled to a 50% refund and not be entitled to a 100% refund.
As an AirBnB host, we want to be sympathetic to guests who are genuinely afraid of traveling in today’s environment. I cancelled two trips to Europe and paid a 50% cancellation fee to the AirBnB host in Rome.
There are three main questions that need to be answered.
1) Are we going to be unsympathetic to guests who want to cancel?
2) Has the guests false claim that the property is infected going to stigmatize the property and lead AirBnB to improperly flag the property as having a problem?
3) How will the property pay its bills in the coming weeks and months?
Some people may experience travel disruptions due to flight cancellations.
Clearly we are sympathetic. I would not choose to be traveling right now. At the same time, we have bills to pay, condo fees that are due and mortgage payments that are due.
In our case, we have a cash reserve that will carry us for a period of time. But that cash reserve never contemplated 0% occupancy for an extended period of time. We are probably not alone in that regard. We will have to tap additional resources in order to cover the negative cash flow.
A 2019 report by the JPMorgan Chase looked at 1.4 million small businesses with a business account at the bank and found 29% were unprofitable, and 47% had less than two weeks of cash liquidity. That means that nearly 76% of US small businesses could be insolvent in less than a month.
You should take immediate steps right now to reduce expenses and conserve cash.