Mentoring by letting another investor live-in during rehab???

Question

So we recently closed on a 5 unit property in central San Diego (Linda Vista near USD).  It's a chop job by the previous owner(s) with lots of work needed - the rehab's going to be big, and it's going to be an adventure for sure.  Tearing down walls, rebuilding structures, and all sorts of other "fun" (read: expensive) stuff.  It's not the first time we've handled a project like this, but it will be the biggest.  It's in a B neighborhood.

One of the units (a 1bd/1ba that could also be a 2bd/1ba) will be pretty much left alone and is entirely habitable right now.  It'll probably rent for $1200/m or so once we're stabilized.

I have no interest in having a complaining retail tenant in there during the rehab, but it also seems like a waste to leave it vacant.  It'd be an awesome opportunity for someone trying to learn about REI watch it in action ... and it'd be good for me to have someone living there during rehab (vandalism being what it is, and all).  If they're willing to help out some, I'd be fine with zero rent from them.

(A) What do you all think?  Worth the effort to try to help someone?

(B) If so, thoughts on how to connect with someone?

(C) Better to just leave it vacant and simplify our construction (the unit will have utility interruptions during work, for example)?

(D) Better to put it on Craigslist and get a half-price renter and put another ~$2500 in my pocket?  Heck, even put it on AirBnB?

(E) Offer it free for 5 months to someone trying to get on their feet again?

It seems like an *awesome* chance to help someone curious about REI and property rehab experience it first hand, but I'd value BP's collective option!

Justin R. · Answer

@Nicholas DiPinto Wish I had met you a couple months ago!

Bruce May Thanks for asking.  Forgot about this thread.  Here's what happened:

The property has 5 units.  4 of them needed major rehab.  One of them (a 1bd/1ba) just needs cosmetics.  I put an ad on Craigslist for the one bed at $500 per month.  Market rent is probably $1100 or so.  The terms were basically something like:

1. Don't call me to fix anything.  You can move out if you can't deal with it.

2. You may lose water or power at times as the plumbers and electricians work.  You gotta be able to roll with it.  Gave them a 5G bucket to keep by the toilet.  :)

3. Lease is per week.  You can leave or I can ask you to leave with 7 days notice at any time.

4. You have to keep the front of the property raked, swept, and tidy.

5. You have to walk the property daily to verify doors locked, windows closed, nothing out of place.

I got 48 responses in the first 6 hours or so.  Another 10 or so yelled at me for trying to scam people out of money.  I had a friend of mine categorize the responses into 3 buckets - bad fit, good fit, great fit.  There were 6 people in the "great fit" category.  Emailed them with a date and time to look at it.  4 said they'd come by.  3 did.

Long story short, I rented the 1bd to a guy who works for a contractor and needed a place to stay for a while.  That's been great - he's helped me dig trenches, do landscaping, skimcoat walls, and other stuff around the property as rehab moved forward.  He's still there.

The really cool part, though, was the third guy who came by.  He and his wife just had a baby who needed emergency heart surgery and 8+ months in the hospital.  Wife moved to Ronald McDonald house.  He had to move to and find a job in San Diego for long term care at Rady's Children's Hospital.  He was staying in hotels at $80/night, which he couldn't afford.  I opened up another unit with no heat and missing some drywall for him, also at $500/m - he was *ecstatic.*  He stayed there about 4 months until the baby could transfer to San Diego and they now live at Ronald McDonald House here.

Don't get me wrong - I profited off of both tenants, so I'm no selfless saint.  But, I think this is a great example of how the business of REI can be used to reach more goals than just making $$.  I was originally thinking of helping a newbie REI person, but it turned out much better - I hope we all keep putting ourselves in positions so things like this can happen.

Joel Owens · Answer

Interesting concept but the little cash flow would not have been worth the potential liability risk at least to me.

Lot's of things could have gone very wrong but it seems by your posts it all turned out okay. Wouldn't make a habit out of that strategy.

Justin R. · Answer

@Steve Babiak Yep.  It was one of those calculated risk things.  I don't know what would have happened if a professional tenant had moved in and caused problems, but the situation was very clearly spelled out and explicitly agreed to ... I would *hope* the legal system would have worked correctly on something like that.  The status quo was generating no revenue at all, so my downside was limited.

There's no City-run inspection programs here, so there's no certificate of occupancy stuff to worry about in the same way as there are in other markets.  And, neighbors did call the City to complain about stuff, but the code compliance staff was working with us while we sought long-term approvals, so they had no issues.

Justin R. · Answer

@Shmuel Harris I treated it just like any other tenancy, gave them all my policies, and held everyone to them.  The biggest risk I saw was a problematic tenant filing some non-habitability claim.  Not sure how that would have played out, but I tried to cover myself with the lease language and by selecting the tenants as carefully as I could.

Steve Babiak · Answer

That is the big issue, because you know up front that there will be times when it does not satisfy habitability. Do you need a certificate of occupancy in order to put somebody in a unit there? What would happen if a neighbor became unhappy and snitched to the authorities? It's not just the occupants that can cause you grief.

Nicholas DiPinto · Answer

Awesome and thanks for letting us know how that turned out. Hopefully I'll see you at the Hillcrest property flip meetup later this month.

Sarah D. · Answer

What a great story, thanks for the update.

Bruce May · Answer

So @Justin R. what did you do with this idea?

Nicholas DiPinto · Answer

I wish I had seen this sooner! I'm in San Diego with some cash to invest and trying to learn everything I can. I would have jumped on this opportunity to learn from someone more experienced than myself and experience a project like this first hand.

Mentoring by letting another investor live-in during rehab???

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