Managing Your Property Management Cashflow During the COVID19 Pandemic
Feeling anxious about how to manage your property management cashflow during COVID19? We got you.
Hopefully you’re safe and at home during these crazy times. If you own a property management company and you’re worried about your cash flow and your business operations during this unprecedented pandemic, this episode of The Property Management Show is exactly what you need.
Greg Crabtree is with us today, and he’s the author behind the book: Simple Numbers, Straight Talk, Big Profit. We’re discussing how to manage cash flow and ease the stress that your business may be feeling.
Introduction to Greg Crabtree
Greg has owned a CPA firm for 33 years, and in January he merged with one of the Top 20 Accounting Firms, Carr, Riggs & Ingram (CRI). This has perhaps turned out to be one of the timeliest mergers in history because he now has access to 2,000 professionals who can help businesses with consulting and expertise in times of crisis like we’re experiencing now.
The consulting Greg provides is based on the Simple Numbers book. There’s a COVID19 task force set up to help you, so if you need additional resources, be sure to check out cricpa.com and look for the resource link. You’ll find additional information that applies to your property management company that includes:
- Loans available to companies like yours
- Business interruption insurance and whether it applies
- Employment benefits and extended sick leave requirements
The Simple Numbers book helps entrepreneurs understand their financials in a clear way. It also provides guiding principles. Companies that have followed the guidance provided in this book are not in a state of panic right now. They were prepared for the crisis and they’ve avoided a lot of the pitfalls that other companies are experiencing right now.
This is why Greg is on the show today. He has a lot of experience working with accounting in property management firms, and he’s going to help with your cash flow.
How to Manage Your Property Management Cashflow During COVID19:
1. Payroll Protection Plan: Apply Now
At the top of the list of things you have to do right now is to prepare to apply for the Payroll Protection Plan (PPP).
Every property management company that has employees and 1099 contractors can benefit from this loan. The information on applying for this loan has been changing day to day, and finally we have a base for how to do it. You’ll need to use calendar year 2019 wages when you apply for this loan. Now that we know this, you can start preparing what you’ll need to access PPP funds.
This is not hard to do:
- Look at your 2019 wages paid that do not exceed $100,000 for your highest paid people.
- Add those wages and divide the number by 12.
- Multiply that number by 2.5.
There’s the amount you’ll be working with for your PPP application.
Here’s an example: If you paid $600,000 in qualified wages in calendar year 2019, that divides into $50,000 per month. Multiply that by 2.5 and you get $125,000.
You need to be in line today with a lender to apply for a loan to cover that $125,000.
If you visit SBA.gov, you’ll find application forms that you can download. That’s not the application itself; you’ll get that from your lender, but it’s the information that you need to start gathering.
Funding is expected to come through at the end of April or the first week of May. The eight weeks after you get funded is your evaluation period, in which you determine how you’ll spend the money.
This loan is potentially forgivable.
This is important because we will never see another forgivable loan in our lifetime from the SBA. It’s huge, and you need to apply for this money. Even if you’re not experiencing a loss right now, all you have to do is certify that there’s enough economic uncertainty in the next three or four months that you need the money.
We can’t think of a single business that won’t be able to certify that.
Spend the money on paper. Show the plan for how you’ll use it to meet payroll, pay rent and utilities, and make the interest payments on any business debt. You want to maximize the forgiveness potential on this loan.
Most of you have a payroll that you know you have to meet, and those numbers will be easy to factor into your calculations.
But don’t forget the maintenance guys and that one contractor who does the landscaping or the cleaning. Those 1099 employees count in your wage base. The individual bookkeeper you might hire that you pay on a 1099 has to be counted. If these are individuals and not companies, you can count them. The government has recognized the necessity of gig economy workers, and they know that your contractors need to be paid.
2. Conduct a Sensitivity Analysis
The next step to managing your property management cashflow during COVID19? Prepare to do a sensitivity analysis.
If you aren’t familiar with this term, you’re basically studying how much uncertainty your business can handle. For property managers, this means how much can rents go down without your management fee before you break even?
Greg has studied the property management industry extensively and he believes companies should run at a 15 percent profitability rate. As an example, he has recently modeled out a 20 percent decline in rents with a client. Some people can’t pay rent, plus there are pre-existing vacancies. That’s his client’s sensitivity. He is cash flow positive down to 20 percent reduction. After the 20 percent, there are difficult decisions to be made.
There is hope that the drop in rents needn’t be as severe as you might fear. With the next four months of federal supplemental unemployment insurance on top of the state-provided unemployment benefits, anyone who has been laid off is getting the equivalent of $23 per hour to stay at home.
That might change. Greg has been warning that this bill was rushed through to get some kind of stimulus in place, and it’s possible Congress will come back and modify those benefits. But for right now, if someone is laid off there isn’t a reason they shouldn’t be able to continue paying their rent. Are they scared to death and perhaps not paying rent because of the uncertainty of things? That’s absolutely possible. But, it’s a different discussion.
You’ll need a strategy. Maybe you’re giving an extended grace period and adding the missed rent payments to the back end of the lease agreement. Maybe you’re letting them stay there without paying rent, hoping their jobs will come back.
The number of people needing a home has not changed. There might be more shared housing going forward, and that could impact the marketplace. A five to 10 percent contraction in the market may be due to people walking out on leases and moving in with others.
The courthouse is closed, so if you’re going to hold firm on rent, how will you file for eviction? You can, you just can’t get into the building. Things are slower and you’ll have to deal with those things as an industry.
There are state and local mandates you also need to watch that are providing legal coverage for people with a contract to pay rent. Be prepared. Some people will play the system, but again – that’s a different discussion. If property managers stick together as an industry, all these things can be worked through. Greg’s advice is to model your own business for the potential impact of this, and adjust for it.
3. Economic Injury Disaster Loans
The PPP loan will get you through June and can keep you going with no real staff cuts.
But, post-June is where you can expect some ripple effects. How do you manage your property management cashflow as COVID19 continues to affect the economy after June?
After the PPP loan, you can apply for an Economic Injury Disaster Loan (EIDL).
Many people will say you can’t have both. That’s not true. You can have both, but you can’t apply for both loans to cover the same loss.
Apply for the PPP first so you know how much you qualify to receive. Then, you can apply for the EIDL and factor in the receipt of your PPP proceeds and its forgiveness. The application has been streamlined, but that loan will still take 60 to 90 days to process.
Eventually, money for PPP loans will run out. Everyone expects the government will continue to fund that program, but you don’t want to be in the second line of businesses waiting for funding. Get yourself in the first line. Talk to your preferred lender right now if they haven’t reached out to you already.
Details, Qualifications, and Exclusions
Remember that these are unprecedented times – the solutions presented for property management cashflow during COVID19 are based on best guesses, not certainty. So no one knows how each detail of these programs will settle. There are interesting circumstances of who qualifies for these loans. Greg and his team have asked some outstanding questions, such as:
- If a contractor is an LLC but a single member LLC filing as a sole proprietor, are they a contractor who can be included in your company’s wages or do they have to apply on their own for a loan?
- Can contractors apply for their own PPP loans? We know two people can’t apply for the same loss.
Ultimately, the lender will have to certify some things and make final decisions about your application. Be prepared – things won’t be 100 percent consistent and that’s not anyone’s fault.
You can probably guess who this rewards.
It rewards the companies that have been doing things the right way. If you have payroll tax returns and W2s for your employees and your books are in order and you’ve filed 1099s, this is going to be a lot easier for you. If you’ve been paying people under the table and taking money out of your business instead of paying yourself a salary and looking for a cheaper way to run your business, you’re not going to benefit from this program.
Opportunities Still Exist in Real Estate and Property Management
There are still a lot of people working.
The people who are working the necessary businesses and can maintain their income will look at this as an opportunity. Real estate agents and property managers are still showing homes, but it’s being done virtually. It’s not as robust, but many parts of the country will do just fine for a while.
The news is sobering. Everyone is in place for another 30 days and that certainly means slower business. The high rate of death will hurt. But, if you’re going to stay optimistic (which we recommend), you’ll see that someone is going to figure out how to slow or eliminate the mortality rate of this virus, and we will all learn how to live with it. It may take some time, but the biotech advances will be substantial, and we will see an improvement.
The death rate downturn will indicate a return to economic health.
To take advantage of opportunities, you need to find a good source of truth. There’s a lot of information out there, and not all of it is trustworthy. As a business owner, Greg recommends you find three or four sources that you return to every day, and ignore everything else.
- Greg’s firm, for example, has great information. You can visit simplenumbers.me and look for templates and downloads available on his crisis management page.
- The SBA is also doing a good job of providing information.
- Check out the U.S. Chamber of Commerce, too. They had some great info about the PPP loan and then it changed just yesterday. Otherwise, their information has been reliable.
Pick three or four key sources of info rather than reading every email chain that comes through.
Spending Your PPP Money: Making Business Decisions and Getting Paid
If you go to the simplenumbers.me website, you’ll see a sample cash flow model for a restaurant. What does a restaurant have to do with your property management business? More than you think, especially from a capitalization standpoint. Cash is your capital requirement.
Your projected losses are the same as cash, so you need to know your loan support based on your cash loss. Understand your business model so you can calculate your losses and decide how much you can fund with PPP.
Don’t borrow money if you don’t think you’ll need it.
In some situations, business owners are finding it’s a better idea to go dark and start another business on another day. If you have no sales and no employees and you have nothing but rent to pay, you might not to close and start over.
But, for a property management company, you’re not going to go to zero. Unless your properties themselves fail, you’re going to have to plan for a revenue reduction that’s 20 to 25 percent. You’re managing the same properties and the same tenants, but revenue will go down.
Think about how you communicate with your property owners.
It’s not a comfortable conversation to imagine, but you might want to ask them to pay a management fee even if rent isn’t being collected. You can’t kick the tenant out, and you’re still managing the property.
A lot of lenders are postponing debt. You might have a lot of owners who won’t have to make mortgage payments for a while. There is no reason for them not to be able to absorb a loss of rent right now. It also makes it easier for you to ask for your fee to continue being paid.
No businesses are following their stated agreements during this time. Everyone is in this together, and we need to ask each other to be reasonable.
Perhaps this informs a future policy for your property management company. Maybe you’ll have a minimum payment requirement in all your future management contracts.
These are unprecedented times and the common theme of advice is to save cash wherever you can.
Tenants are taking advantage of rent deferrals because owners are taking advantage of their loans getting deferred. If your lender offers you a three month deferral, take it. Why wouldn’t you? But if you’re working with an owner who is accepting a loan deferral but still insisting that rent be paid despite widespread unemployment and fear; that might not be someone you want to work with. It really reveals the character of a person who is getting a payment deferral but not passing it on to tenants.
Mitigating Property Management Cashflow in COVID19: Staff Cuts
Your initial instinct may be to cut people. That’s where property management companies will struggle. If you have already laid someone off and you get the PPP loan and want to hire them back, they may say no thanks if they’re earning more on unemployment.
So, another hidden benefit is that there are plenty of people who don’t care about unemployment and would prefer to work.
That means you can upgrade your staff.
Upgrade Your Team
It’s a good time to look at your staff and let anyone go who isn’t a performer. You’re going to find a larger pool of better people to choose from. The PPP forgiveness loan does not require the same bodies, just the same FTE count.
Everyone in the property management industry has been working so hard to build good teams. A situation like this will expose anyone who doesn’t add anything to your business.
Greg says that sales people don’t like to hear it, but the first thing that comes to mind is the money most property management companies may be spending on sales commissions.
Greg prefers using marketing methodology to build leads. It essentially creates a team approach to sales. A marketing and customer acquisition process should not be dependent on one person. It’s a coordinated activity.
Sales commissions can also pay for unintended successes rather than level of effort. A sales person right now can be working overtime trying to bring in new business, but the market won’t allow it. In a strong market, sales leads could land in a sales person’s lap without any effort, and the big commission will still be paid.
Greg prefers the model of paying people according to the value of what they do every day. If you have a good strategy and you offer a good product or service and your team executes, you’ll be successful. When you create lazy compensation plans that say you’ll only pay a person if they’re successful, it’s a false structure. They may not be successful because of what they’re doing. They may get handed a deal they had nothing to do with. Then, you’ve wasted a big wad of compensation on someone.
Pay Attention to Marketing Effectiveness Expenditures
If you do good marketing, sales is just an operational process. If your marketing is terrible, it’s because you can’t tell your story about why you’re special. You shouldn’t be selling features and benefits, you should be telling stories. Why do investors love you?
The marketing effectiveness expenditure is important. You should keep spending money on marketing AS LONG AS IT’S EFFECTIVE.
How much should you spend on marketing? Greg says you should spend every dollar that’s effective.
Property management cashflow during COVID19 is tricky to manage: companies are feeling cash strapped. But, the smart companies are spending money on their advertising because they see the opportunity. Their competitors are pulling back, creating a larger space for them to pick up new properties and new owners.
Picking up just one or two new customers will replace the 20 percent decline the industry is expecting.
If you’re well-positioned, the money you invest in marketing now will really take off next year. Companies that can spend a little extra money on message and story will absolutely come out ahead. Can you tell customers why you’re surviving this and your competitors aren’t? That’s going to bring in a lot of new business.
The financial stress is creating an intersection of opportunity and need. Be there for it.
A property management client we recently spoke to signed up four new properties this week because he continues to push the value of his services. If you can do it financially, marketing now is very beneficial. Landlords who are self-managing have no idea what to do with their tenants who can’t pay rent. They need a support system, and that system starts with professional property management.
Show the DIY landlords that you’re more than a rent collector. Those landlords are right now feeling how hard it is to navigate these difficult times.
Comparing the Market Downturns: A Decade Ago vs. Now
When thinking about managing your property management cashflow while COVID19 is making history, it’s helpful to look back and review similar events that have already happened.
Take 2008, for example: When the market crashed over a decade ago, a lot of landlords were going on Google and typing in things like: how to rent a home or how to screen a tenant and the property managers that built the foundation of their companies with content and educational videos and blogs really capitalized on those searches.
The same thing is happening now. Make some videos. Be the educational resource landlords need. Look at Greg and his company and the resources they’re providing on the financial side. People need help, and you can be successful by supporting them.
Not everything will repeat, and that’s the good news. Greg believes monetary policy is being better managed through this crisis than in 2008. The mistakes made in 2008 are not being repeated. But, it’s still an unwritten story. We are much closer to the beginning than the end.
Well-built, better performing business have opportunities. The herd will be thinned and those without good practices will no longer be in the race.
Greg expects the economy and the industry can recover into where we were. If the shutdowns extends significantly beyond June, there may be a different set of challenges that will be more disruptive.
The lengthening of A/R days and the shortening of A/P days is the most urgent danger. It creates a higher capital requirement to run a business. If we can get back to normal A/R payment days, the underlying power of the private U.S. business economy will prevail.
Greg points out that the biggest difference between third world economies and first world economies is the speed of cash from service by provider to payment by customer.
The more you shorten that time frame, the less capital is required to run a business. This disruption puts pressure on that.
Jack Stack is a business leader who said open book management is important. One of the things Jack really touts is the idea of reforecasting. If there was ever a time that you needed to get into your numbers and not look in the rearview mirror, it’s now. You have to learn to forecast and reforecast.
You can reforecast every week. If you don’t have your March books closed yet, you need to get them closed so you can forecast April. Next week, you’ll know more than you know now, so it will be time to reforecast. Then, look at May and June. Keep reforecasting and you’ll stay balanced. It will make you a better business owner than what you are today.
What You Should Remember About Managing Property Management Cashflow During COVID19:
- Apply for the Payroll Protection Plan (PPP)
- Conduct a Sensitivity Analysis
- Apply for the Economic Injury Disaster Loan (EIDL)
A huge thank you to Greg Crabtree and our listeners. If you have any other questions about managing your property management cashflow during COVID19, or the effects of the pandemic on other aspects of your property management marketing, contact us at Fourandhalf.
Stay well and be well and apply for your PPP loan right now.
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