To call 2020 a ridiculously crazy year would be the understatement of the century.
Coronavirus, or Covid-19 as it’s officially known, has turned the world completely upside down.
Who would have thought that coming into the first year of the new decade we would be sat here in self isolation, watching the global economy crumble.
Whilst I have been at home in isolation, I’ve found it interesting reading different accounts of problems that have occurred within specific businesses. There have been so many negative impacts for business and entrepreneurs, and these impacts have been on a magnitude we haven’t felt across the globe since the 2008 crisis.
I wanted to take the time to summarise one of the problems I have stumbled across, and I thought it would be useful to distill this issue into a lesson that we can take from this period of time and learn from, in order to avoid making the same mistake if/when the next pandemic appears.
“Only when the tide goes out do you discover who’s been swimming naked”Warren Buffett
I want to describe one of the scenarios whereby people have been swimming butt naked, and they’re now scrambling to secure their businesses/futures. I don’t mean this as a post to rub salt into the wounds of these people, I am highlighting these stories to ensure others don’t make the same mistakes later down the line.
When times are good, the economy is buoyant, and the global indices are growing nicely, people take more risks to capitalise on the upswing.
However, the tides can change quickly, and as people were gearing up to exploit business opportunities, the measured risk they thought they were taking at the time eventually becomes an unmanageable problem.
Airbnb has created a boom in ‘semi-professional landlords’ who thought they could create mini real estate empires by utilising data on Airdna.co so buy property in areas with high % occupancy rates, as well as higher yield areas.
Airbnb does such an amazing job at giving a platform for landlords and renters to connect, which is why it’s recently been valued at ~$38bn.
This new paradigm in opportunity created a new avenue for semi savvy entrepreneurs to explore.
Yes, many of us more sensible individuals will clearly understand that leveraging ten mortgages on properties that you rent out on Airbnb is a recipe for a disaster – but there is no doubt that many of these people will have made a lot of money…until now.
There are countless amounts of videos from ‘entrepreneurs’ selling courses on how to become superhosts.
What Went Wrong?
You’ll be surprised by how many individuals will have taken out multiple mortgages to buy property.
Quite simply, as we all know by now, the entire hospitality industry has ground to a halt, which means occupancy rates of short term rental properties have gone to 0%.
So, many people who were making a lot of money at one point are now having to cover huge monthly mortgage payments – which they can’t afford.
Now, many banks will foreclose the properties and sell them at auction due to the fact the supply will now outstrip demand.
It’s a lose-lose for everyone. Banks will likely lose capital, and the former landlords will likely go bust.
Only ever invest what you can afford to lose.
When you over leverage yourselves, you’re putting immense pressure on the market to perform consistently for you.
Time and time we are reminded of the risk of going ‘too big’, so don’t forget it.
Build your assets slowly, and remember, Rome was not built in a day.