How to survive COVID-19 as a short-term letting business?

How to survive COVID-19 as a short-term letting business?

My dad and step-mum own a small short-term letting business in the Southern Highlands. The complex used to be a motel which was strata-ed into 32 residential units. There is a mix of short-term rentals, long-term rentals and residents within the complex. My parents live on site and manage the short-term letting side of the business.

In the past 3-4 years they have been there, they have improved the business drastically, occupancy rates have gone up and average daily rates are attractive for the type of accommodation it provides. They normally advertise through and their own website. They get a lot of bookings throughout the year for people travelling down to the Highlands for weddings, tourism or even work (trades mainly). They worked very hard to also get the ratings in to be now averaging c.8.4/10. For the type of accommodation they’re operating, this is a pretty big feat.

Over night that has turned due to COVID-19.

Initially, it was not so obvious, as it is located in the country, the effects of COVID-19 was not hard felt by the business. As the government slowly implemented more and more restrictions, with the latest banning gatherings for weddings (their main source of reason of stays), their bookings dried overnight with cancellations (from now until the end of the year) filling their inboxes and voicemails. This instantly makes their small business unviable to continue. A lot of the owners in their letting pool will have minimal income for the next few months. As they also own a few of the units within the strata, they also face hefty issues around expenses (interest on their home loan, rates, taxes, bills, strata levies etc) and the impacts of that on their cash flow.

There are a few avenues in the times of despair. Hopefully those in similar situations can get the most out of what’s offered by the government and hang on tight for a bumpy ride.

Government Incentives

One of the incentives proposed by the government seeks to boost the cash flow of small to medium businesses that employ people (they have 1 PAYG employee). From this scheme, it looks like my parents will be able to access at minimum (for the March quarter) $10,000 credit when they do their BAS and then another 2 x $5,000 instalments for the June and September quarter. TBC.

Since their business has all but dried up now, they might also be able to access Centrelink payments to sustain the minimum amount to survive this hardship. I got them both to register on Centrelink and see what they need to provide in terms of documentation.

Pivot from short-term to long-ish term?

Another idea we have brainstormed and probably already actioned by a lot of the short-term letting (Airbnb etc) landlords is to turn the short-term letting to longer term letting. This might work out as the units are usually either studios or 1 bedroom apartments supplied with a kitchenette and bathroom. However, in their case, we probably don’t want leases (given that most owners are in the pool for short-term letting).

If this is to be actioned, we will need to advertise on various different websites and ensure that the tenant selection process is robust. There are a lot of concerns as people risk losing their jobs and will be unable to meet their rent payments. Landlords are already taking the grunt of it as it’s now becoming the norm. I’m thinking maybe they can try to rent one of the units out with 20-30% discount to market (there’s another unit renting at c.$280/week at the moment so maybe they can rent at c.$250/week) but ensure they have 4 weeks bond and can pay 3-6 months in advance for a 6 month lease. There will be few and far between tenants who will be able to do this but maybe for a good discount we will get some applications.

Key Takeaways

Diversify. Your. Income. Which applies to everyone. As Warren Buffet says “Only when the tide goes out do you discover who’s been swimming naked.”

My parents are swimming naked, having bought a lot of units within the same strata complex, they have effectively concentrated their risks by “putting all the eggs in one basket”. They operate in the hospitality industry which is the first to tank when there is a financial crisis (or a virus crisis in this case). In order to secure their future, they will need to look to diversify their income streams to other arenas. This will be hard as they’re getting old and not really privy to what else is possible, their skills will be limited as well.

This is one of the reasons why I’ve started this blog in the midst of the COVID-19 outbreak. I’ve also been swimming naked given my high levels of leverage in my investment property and home. If my tenant doesn’t have a job and can’t pay their rent, I will really struggle financially to make the mortgage repayments. By hopefully sharing some of these learnings throughout the COVID-19 outbreak, we can all double down to pay our debts (before taking on new ones) by taking on new side hustles (in times of despair there will be opportunities).

Have you been adversely affected by COVID-19? How are you overcoming the adversities? What changes or pivots do you and your business need to make to survive these tough times?

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