A couple weeks ago, when the stock market went down substantially, one fellow real estate investor made a comment saying that her real estate investment didn’t get affected and it was still going up and up.
At the time, coronavirus hadn’t been considered a pandemic yet.
My perspective was slightly different. My family and friends are all in Hong Kong and China taking a hit. The stock market tanked and so has the real estate market in Asia.
They already went through the craziness with toilet paper and food a month or so ago. The toilet paper supply went back to normal within a week. Nothing really changed with the food supply.
When humanity is facing a pandemic, no one is immune from it. Real estate investors, stock investors, employees, small business owners, parents, single, kids… no one.
Instead of making clueless comments about how great real estate is in comparison to the stock market, why don’t we take a look at our portfolio and see what we can do to prepare, just in case $hit hits the fan?
Let’s take a look at these 7 tips to prepare for coronavirus as real estate investors.
- Have cash reserve for 3 months or so for your rental properties
Tax planning is done ahead of time, so as contingency planning.
Having a cash reserve of at least 3 months to cover your expenses is the key. If the tenants aren’t able to pay rent, you have at least some cash reserve to last for a few months.
If you don’t have 3 months to cover your expenses, it is okay. We live and learn. Start now, allocate a portion of your income/cash flow in a savings account.
- When times are bad, consider taking the programs offered by the bank (skip a payment, pay less, or even spread the payment)
Many banks offer “skip a payment” option with certain conditions.
This is the time that we all should look into the possibility of skipping a payment.
You may never need it, but always educate yourself, just in case.
- Prioritize your payments (property taxes, utilities vs. mortgage payment)
Property tax and utilities bills are important, but they probably aren’t as important as your mortgage payment.
When times are tight, consider making partial payment to property tax and utilities bills. Reserve more cash for mortgage payments.
- Have access to cash bills
A mentor once told us that he would keep some amount of cash at home, just in case. We’ve always kept some amount of cash bills as a backup.
Cash is cash, cash isn’t a plastic card, cash can be used when there’s no electricity.
That’s why I keep some amount of cash at home for emergencies like this.
It is difficult to estimate how much is needed, but cash always comes in handy. 😊
- Get additional credit if possible
Who knows when the bank is going to tighten up?
The governments from around the world have been trying as much as possible to stimulate the economy. They even went as far as lowering the interest rate twice and loosening up the cash reserve requirement imposed on the bank.
Realistically, it should be easier than ever to get financing.
If you have an opportunity to refinance your property, get more credit, by all means, go for it. Take them when they’re available.
Structure the extra credit as Line of credit so no additional cost is incurred when you’re not using it.
- Delay all non-essential travel, repairs & spending 😊
We cancelled our planned trip to Hong Kong in May. It was supposed to be my once a year visit to my parents. We delayed it from December to May due to political unrest in Hong Kong. Now, we’re delaying it again, because of coronavirus.
We also delayed in firming up our Wealth Hacker Conference 2020. We already committed to a speaker and we hired our event planner.
We haven’t financially committed to our venue yet. As much as we would love to do so, it would be a crazy move for us to make the commitment now.
Applying the same principle to real estate, if you have any planned non-urgent repairs, such as replacing a roof that’s old but not leaking, etc., I would consider delaying the expense to preserve your cash on hand.
Just in case the tenants aren’t paying rent.
- Taking advantage of the cheap stock
We hosted a meet up last week among some of our clients who’re interested in stock hacking.
Many of them are beginners and we’re all trying to figure out ways to make money in this down market.
One of the stocks that came out as the front runner is Enbridge. (Just so you know, I am not endorsing anything. This is a discussion among friends. This is not investment advice.)
Enbridge currently has an 8% dividend yield. This means that you’re going to get an annual dividend equivalent to 8% of today’s stock price.
This also means your Cash on Cash return on the stock is 8%, if you were to purchase the stock at current price.
What’s going to happen when stock goes further down?
Reality is, all of us Canadians still need to live and use gas, we still need to pay for utility bills…
Chances are, there’s minimal effect on Enbridge and its dividend.
This dividend income is similar to rental income you’re getting from your properties, except it is taxed at a lower rate.
Is it time to go in? It really depends on what your risk tolerance level is. 😊
I’m interested to see how everything goes in the next year or so.
Hopefully this provides you with some helpful tips to be prepared.
Until next time, stay safe, keep a safe distance from others.
Cherry Chan, CPA, CA
Your Real Estate Accountant