As a property owner, this question or some version of it has come to mind at least once or a few times, “How do you sleep at night with 600K of debt?”. The 600K of debt that I’m referring to are two unpaid mortgages that I still carry. We know it’s not exactly ALL debt because it’s an appreciating asset, etc etc, but I wanted to dive into this a bit further.

I have two mortgages. They are being rented and are cash flowing properties, but they are still debt that I’m carrying. This post will look at the absolute worst-case scenario. As a property owner, you should know or at least think about how long you could survive if you had to cover the full cost of your mortgages if your tenants were unable to pay the rent. It’s not a great thought but it is a necessary one. Without knowing what the worse case scenarios could be then you can’t protect yourself from it.

How To Prepare For An Apocalyptic Time Like Covid

Due to Covid, many people lost their job, perhaps lost the top earner or all earners in their household, virtually overnight. Things were shutdown with no clear end in mind. Government help took time as they had millions to assist as they scrambled to come up with a plan. Although events as tragic as these are rare, they still happen. You wouldn’t want to be caught without a plan, so let’s make one.

Define the Worse Situation As a Property Owner

First, let’s define the worst-case scenario as a property owner: You lose your job and all of your tenants stop paying rent. Looking specifically at my situation, my monthly debt would sum up to $6363.55. This includes two mortgages, student loan payment, a car note, car insurance, phone bill, food budget, dog food, and utilities.

Know Your Total Savings: Liquid & Non- Liquid

My emergency fund consists of $154,000 of liquid assets with $60,000 of that being easily accessible cash. The easily accessible cash I’m referring to is a combination of security deposits and cash in my brokerage accounts. The rest of the cash is in my 401K, Roth IRA, or HSA account. It would take longer to access these funds.

Know Your Exit Strategy

My first plan of attack would be to use the money I have in my savings accounts. During the start of Covid, the market dropped by at least 30%. If I immediately sold what was in my brokerage account I would lose 15K in a similar scenario.

Using my savings I could cover 2 months worth of expenses, leaving me with $47,247. After two month I would expect my unemployment to be approved. I’d received $713 a week, the max weekly unemployment benefit based on my salary for New Jersey. That would bring my monthly expenses down to $3511. Although due to covid, there was an additional $400 benefit that was provided by the government, I will exclude this as I’m planning for the worst case. Unemployment benefits last for only 6 months, so at the end of 6 months I would be left with $26,181. That would allow for an additional 4 months of survival before I would have to tap into my retirement accounts. In summary, I would be able to stay afloat for about a year on my savings.

Nothing is worse that facing a disaster without a plan. Thinking about what could go wrong doesn’t mean you’re focused on things going wrong. It mean should things go wrong you’ll be better prepared for the situation.

Quick Recap: Remain a Property Owner

  1. Save up an emergency
  2. Know how much cash you have
  3. Know how you could access your cash
    • unemployment benefits
    • security deposits
    • retirement accounts