Dealing with nightmare tenants

Here's my worst horror story and how you can mitigate this risk [7 min read]

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For many, the thought of buying a rental property is daunting. The most common reason I hear is the fear of having a nightmare tenant. So let’s start there. I've dedicated my first post to sharing my worst tenant story, the lessons I learned, and how you can avoid this nightmare.

The Backstory

It’s Winter of 2017. I’m midway through my career at Google. I spent the last year learning about real estate investing primarily from colleagues, podcasts, books, and mentors. I finally took the plunge into investing earlier this year and purchased two rental properties in Atlanta. Things were going well with both of them, so I figured, why not go for #3?

I found a great property in a C-class neighborhood in south Atlanta. While the location wasn’t favorable, the monthly cash-flow financials were solid - and that was my primary goal at the time. I made an offer on the property and proceeded with the due diligence. Here are the simplified monthly financials I was able to verify:

Simplified forecast, using the last 12 months P&L

Since I was self-managing at the time, I was making an extra $145 per month (stay tuned for a future post on self-managing versus hiring a property manager). This deal felt solid - so I decided to pursue it. After all, this ROI didn’t even include the appreciation and tax benefits I would be reaping. Let’s do this!

The Nightmare

The purchase and transition went smoothly for the first several months. Rents were always on time and expenses within the forecast. This was a cash cow...or so I thought! Just after the 1 year mark, the tenant missed their rent payment. No big deal, I’ve read about this. It shouldn’t be that hard right? Wrong.

I scheduled a call for the following week with the tenant. During our call, she told me that her husband was on Social Security and that their check was late. No problem. After all, who isn’t familiar with snail mail? And also, she’s always paid on time, so I should cut her some slack, right? So I did. Then, two weeks later: still no rent (and no update). When the next month’s rent was coming up, a different reason came up. The conversation started to loop. Something didn’t feel right. After a few more conversations, I could feel the cycle repeating. I was being suckered, and I didn’t even see it. I had lost 2.5 months of rent before I took a firm stand.

I mustered the courage to text her: “If rent is not paid within the next 2 weeks, I will be filing for eviction.” Her response baffled me: “hah ok.” But that’s OK - I had it on the record (for the record, more than this SMS is required to actually be considered “on the record” in a court of law).

I began the eviction proceedings. I filed, refiled, and refiled again. Constantly, my documents were rejected for various reasons (mostly for unknown, procedural oversights - i.e. not filling out the middle name of the tenant). Finally, after another month, I hired an attorney, and we started the process over. In total, four months had passed from my initial outreach to the eviction being ordered by the judge. Then, another 3 weeks to get the eviction scheduled. But finally, some reprieve - scheduling a date means it will soon be over. Or so I thought..

I was asked explicitly to not let the tenant know about the eviction date; this ensures the safety of the officers that carry out the eviction order. So you can imagine her surprise when the officer showed up on her doorstep and forced her to leave immediately.

Needless to say, she was pissed off. Imagine, all of her personal items (and her family) were forcibly removed from the premises. Yes, she didn’t pay rent for months, but even then, the image of all of her items scattered across the driveway in the pouring rain is an image I remember vividly. But this wasn’t the end. She called me and threatened boldly, “I’m going to get you back. Just watch.” I immediately increased security measures (notified authorities, upgraded locks, installed cameras, etc).

The very next day, I saw it - she made good on her threat. She busted every room in with a shovel, broke multiple windows, vandalized every wall, stole the appliances, and destroyed the cameras.

All pictures and video here

I was horrified. This type of damage wasn’t even comprehensible to me as a possibility. After all, the tenant was aware of the eviction proceedings (she even showed up to court and heard the judge order the eviction). How could she possibly do this to me after all the leeway I gave her??

This was supposed to be a great week: it was my birthday. And one of my close friends just got engaged, so I was extra excited to celebrate. Instead, I was in Mountain View on the phone with the police, insurance companies, and my family. I was emotional. I was sad. Imposter syndrome set in: I questioned if I was qualified to be “an investor.” I was all but certain my real estate investing days were over.

It didn’t help how unfazed others around me were in the moment. The insurance agent documented their progress and didn’t even negotiate to cover the damages. The police officer also didn’t miss his opportunity to minimize the situation, assuring me this “happens all the time.” I asked him if he’s aware of the NFG gang in the Atlanta area as pictured above. His coy response was probably the only thing that made me smile that evening: “Sir, I believe that is the youth slang for No F***s Given.” Cool.

In the end, the process took nearly 8 months and beyond the emotional toll, this experience carried a large financial burden. Here’s how things ended up:

The Recovery

After pulling myself out of a pretty traumatic emotional hole, I was able to slowly move past the situation. It was time to begin the renovation work. Fortunately, my brother ran point on the project, so I was able to keep a close eye along the way.

This was his first project, and he knocked it out of the park. Here’s how the same unit pictured above looked after renovation:

Full link of pictures is here

When all was said and done, I was able to place a new tenant, sell the property at a sizable gain, and defer taxes via a commonly known tax loophole called “1031 Exchange”. Even more important, though, are the dozens of lessons I learned. And most important, with the support of family, friends, and colleagues, I was able to pick myself up and continue investing. Here are the top lessons from this specific experience that can help you avoid the same misfortune:

1. Match your insurance to your risk tolerance. There are two types of rental insurance coverage: RCV (replacement cost value) and ACV (actual cash value). RCV (more expensive) covers the cost to repair the property; whereas ACV includes depreciation, leaving you with an adjusted (lower) amount. Back then, I was willing to risk this event to save a few hundred dollars each month. Now, I am not.

2. Evictions are immensely expensive. Mitigating this risk starts with the proper vetting of the tenant. This is crucial - here’s a good article that outlines how to screen tenants to optimize your protection. If it comes to missed rent, start the eviction process early and communicate clearly throughout. In the worst case, try a "cash for keys" strategy where you pay for a peaceful move out - trust me, it’ll be less costly in the end.

3. Start the eviction process immediately when rent is missed. If rent gets paid after the process has started, it’s very easy to cancel (and a fraction of the cost vs. starting too late). It also sets a good precedent to the tenant. If you’re feeling too empathetic like I was, you can let them know that you’re required to do this otherwise you may come off as discriminating and violating Fair Housing laws (credit to Jay Pillai and Kevin Wood for this suggestion).

4. Bring in professionals for these black swan events. This process took too long (~8 months). Not only did I have a full time job, but also I wasn’t well versed in procedure. And learning the bare minimum I needed to proceed was not worth the cost, time, or energy. Once I hired the attorney, the process was streamlined and ended up costing less than the additional month (in terms of lost rent) I had spent trying myself.

This is my first time writing. If you enjoyed it, consider subscribing. For now, I’ve committed to writing once per quarter. I’m always open to engaging on real estate. And if you have a specific story or topic of interest, let me know!