2013 Mistakes/Failures & Lessons Learned - Spill your guts!

[J. Martin]

I love to see the success stories on BP, but it’s also important to learn from mistakes in the past – and better to learn from someone else’s mistake than your own! Without sounding negative, lets spill some of our worst of 2013, and hopefully have everyone learn a little in the process. Share your mistake, failure, or pain of 2013, and the lessons you can share with the rest of BP from that experience. I’ll kick it off:

Took Bad Tenant – when I knew it!

I had just purchased and began renovating a completely vacant REO 4plex when the neighbors next door came over to inquire about the units, and wanted to move in as soon as possible to the same-layout unit in my building from next door. They explained their building was leaking, weren't getting along with their landlord (a family member of theirs), and were ready to move in immediately without any rehab. (The unit was in overall good shape and we put on new paint, but cabinets were old/facade starting to peal. Needed cleaning.) The bad relationship with the landlord/family member, urgency to move in, and bickering amongst the multi-generational family were all red flags. But I was in the midst of bigger projects sucking down my reserves on the other units, had 3 units I would need to market, and could use the cash flow in the meantime..

So I decided to go against my better judgment and rented it out to them. The caveat I included to mitigate my risk was to get a 2-month deposit, the max allowed in CA for an unfurnished unit (typical in market is 1 month). I hoped this would provide me more cushion and an exit strategy in the case they left – and they came up with most of it a week later, despite being in a low-income area. Sure enough, 6 months later, they get in a fight, leaving the mother/grandma to split, and inadequate cash flow to pay rent, and they needed to downsize. The saving grace was the 2 month deposit, and a little save from the market. I told them if they left by the end of the month, I would give them the remaining month’s deposit to go get a new place, avoid any eviction, and they would have to clean, touch up the paint, and work with me to show the unit before the 1st.

I ended up getting lucky here - renting the unit with 1 day turnover at a higher rent than previously, to a better tenant, w/ no out of pocket except my time. But I realize I got lucky this time (partially with my 2 month deposit mitigant, and partially by a strong rental market). My biggest lessons learned here were:

1) Have more than enough reserves than you think you might need (or quick, reliable access to other cash)

2) Know your standards, and stick to them

3) Don’t give up long-term goals for short-term gains

4) Have an exit strategy/mitigant in place for weak(er) tenants if you do accept them or are in your tenant pool due to geographical location.