How to Best Prepare for a Tenant Trashing Your Property

by | BiggerPockets.com

Real estate is not fairytales and butterflies like it’s portrayed by gurus and seminars. Look, eventually your property is going to get trashed, and it’s going to need a lot of repairs. It happens. That is real estate. Real estate is hard work, and it’s a rollercoaster ride. So, if you can acknowledge and accept that today before you start your journey, you’re going to be much better off when it actually does happen.

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When a Tenant Causes Damage

For those of you who don’t know, I’ve run a turnkey company for about six years. We work with a variety of investors, and one thing that we’re picky about is we don’t accept anyone looking to finance properties. It has to be a strict cash purchase. Recently, one of our investors bought a property from us for cash, then refinanced it without us knowing and pulled out a lot of money. On paper, based off of our property management and what we can see, the rate of return was over 10 percent year after year. Then a tenant in one of his properties caused a lot of damage.

This has only happened to me a handful of times in the last six years or so, but once again, it does happen. Then the investor got upset with us because we did not walk through the property every day to see what was going on. I hope you can sense the sarcasm. After that, they told us that they refinanced the property, had debt on it, and didn’t make money for two years because of the needed repairs. Of course, what an investor does when it comes to refinancing is out of our control. But what I do want to tell you is that if you expect those kinds of things, it’s not going to hit you as hard as it would if you believe your entire real estate journey is going to be fairytales and butterflies.

Related: 12 Tenant Nightmare Stories I Swear Are Actually True

Prepare for the Worst, Hope for the Best

Let me give you a hypothetical situation of what my beliefs are when it comes to investing in real estate. You have to prepare for the worst and hope for the best. What that means is if you are building a real estate portfolio, you should build that portfolio with cash-only properties. Do that for as long as you can, until you start getting a certain amount of real estate in your portfolio. Let me point out that we are talking about the Midwest here. I believe that investors should buy the first three to five properties with cash—meaning that they should have no loans and control those assets outright. Then, if you want to start leveraging, you can start looking at that for the last three, four, or five properties. I think investors who have 10 properties in their portfolio in the Midwest where the cashflow is good usually have a nice passive income before they get out of bed.

Investors should build their portfolio this way because there are going to be times when three of your properties become vacant and one of your properties gets trashed. Now, if you have a mortgage or mortgages on all of those properties, you could be in a lot of trouble. Why? Because you’re going to get hit with a $10,000 to $20,000 repair bill to get the property back to working order, and you’re going to have another three properties that are going to be vacant that will cost you money every single month. Now, in the Midwest, it gets pretty cold, so what happens if in the middle of winter you can’t get a property tenanted for a couple of months? Then you’re going to have to work overtime to cover the expenses on all those mortgages. It’s not going to be fun, and it will probably turn you off so much that you will not want to invest in real estate because the reason you started your journey was financial freedom and passive income. You didn’t want a headache or a hassle and definitely didn’t want to lose money every month because your portfolio has turned to crap.

It does happens, and it likely will happen to you. You have to prepare for the worst and hope for the best. You also have to understand that one day in the future, out of all 10 of your properties, three will become vacant and one tenant will trash your property in the heart of winter, and you won’t be able to get it tenanted. So, if you understand these things and prepare for them, you’ll be better off. Yes, it’s going to take longer to build that portfolio up, but in my opinion, it’s going to be more sustainable and self-sufficient for the long haul and will give you true financial freedom.

Another thing I want to mention in regard to a tenant trashing your property is safety comes in numbers. You cannot expect a lot from owning one or two properties unless it’s a multifamily complex or commercial building on Fifth Avenue. You need to have a volume-type mindset, with a goal to accumulate 10, 15, or 20 single family homes. Hopefully, the majority of them are cash-owned properties. Then, if something happens with three to five of them, you can still have the cash properties that are cash flowing and producing income to cover any shortfall on the rest of your properties.

Take it or leave it. Those are my beliefs. That, in my opinion, is how you can prepare and set the tone in your mind from the start of when a tenant trashes your property. This is more from an investor mindset perspective so you can prepare you and your portfolio for whatever happens when it does happen.

Am I right or am I wrong? How are you building your portfolio? How do you buy properties? How do you deal with tenants?

I’d love to hear from you. Comment below.

About Author

Engelo Rumora

Engelo Rumora, the Real Estate Dingo and your favorite Australian, quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He is currently in the process of launching an ICO that will “Decentralize The Real Estate Industry.” He’s also known for giving houses away to people in need and his crazy videos on YouTube. His life’s mission is to be remembered as someone who gave it his all and gave it all away.

19 Comments

  1. Randy E.

    Engelo, I can’t believe I just read someone else who agrees that it might just be a good idea to own (at least the first few) investment properties with no debt.

    That was a goal of mine when I started, because I learned in my youth, while managing properties-not-mine, that unexpected expenses will come sooner or later. And I knew that my personal situation was such that if I was spending most of the rental income on the investment mortgage that I would be in trouble if trouble came calling. I wasn’t able to buy my first few with all cash, but I owed very (very very) little and paid off each before a year or two passed. Now, I’m moving into leveraging and I feel a lot more comfortable with the idea.

    However, there are many BP opinionators who insist that carrying 30-year mortgages is not only the “best” way to invest in real estate, but that it is the only legitimate way. I know better. I know there are many right choices and it all depends on each investor and his/her goals, abilities, and financial situation. But I worry sometimes that newbies might takes these bloviators’ opinions to heart and ignore the positive aspects of owning REI with no associated debt.

    Thanks again Engelo for the breath of fresh air.

    • Engelo Rumora

      Hi Randy,

      Thanks for your comment.

      Everyone is always looking for a “quick and easy” way.

      In my opinion such a way doesn’t exist.

      It takes time, hard work and sacrifice to build a business that will be sustainable for the long haul.

      Investing in real estate should be treated like a business.

      Starting out with cash and then leveraging at a later date is something that I’ve been saying for years.

      Many folks leverage from the start and as soon as property becomes vacant, the cash that was collected is gone to the repairs and the end up making a 0% return.

      It the same property was owned outright, they would have made a much better ROI than 0% lol

      This is just my opinion off course and everyone’s situation is different.

      I buy with cash tho and will continue to do so.

      Much success

  2. Jeff Krauss

    Buying rental real estate with cash is just absolutely terrible financial advice. Leveraging properties increases the ROI by two or three times. Frankly, if someone doesn’t have another source of income that can pay for repairs and renovations, then they shouldn’t be in the rental business. They should just put their money in Real Estate Investment Trusts making 7%-10% ROI and sleep well at night. Frankly, if I were only making a measly 10% on my rentals, I’d sell them all and do exactly that.

    • Engelo Rumora

      Thanks Jeff,

      Investing in real estate should be passive and profitable.

      If you need “another source of income” to cover losses then you are doing something wrong.

      In my opinion it would be buying the wrong deals and using to much leverage

      Thanks again and much success

    • Raymond Jensen

      “Leveraging properties increases the ROI by two or three times.”

      Yeah, when times are good. Debt is a two-edged sword. I know a man who has 900 units and owns most of them outright. He said during the last recession, a bank came to him wanting to unload a 100-unit apartment. He said he would give them $300000 for it and the bank accepted. I wonder what the ROI was for the “investors” who borrowed $1M+ for that apartment complex before the recession hit and they went bust? Warren Buffet once said (and I think he’s a hypocrite for saying it) that if you are smart enough, you don’t need leverage and if you are not smart enough, you should not be using it.

  3. Nathan G.

    This is a good article with very practical advice. like all advice, it should be tailored to your personal situation. A married couple earning $200, 000 a year may be okay to handle a $20,000 loss without digging into their savings account, whereas someone with an income of $60,000 could be financially devastated.

    It’s not just bad tenants, either. Every time I buy an investment, something unexpected pops up. I bought a hoarder house and had to unexpectedly replace a $5,000 furnace and all the duct work. I bought an 11-plex and immediately lost four tenants, a $2,000 furnace, had to renovate three units at a cost of $10,000 and had two tenants that couldn’t pay on time. In June I bought a six-plex and within two weeks I had two units go vacant and a third had a drug bust. Last week the 70-gallon water heater went out.

    Fortunately, I always keep a reserve when buying new property and all my cash-flow goes right into that account so I can quickly build it back up and be prepared for the inevitable disaster. Because I am prepared, I have never been stressed once and my portfolio remains strong.

      • Nathan G.

        ..and I almost forgot my very first investment! It was a townhome for $67,000. I bought it with $7,000 down. Within two months the sewer backed up because of tree roots. I had to replace the sewer line and remove the at a cost of $6,000. One month later I received notice that a special assessment of $3,700 was due to the HOA. My REALTOR (and father-in-law) failed to tell me it was coming due. $10,000 in my first three months of ownership on a townhome that rented for $475!!!

    • Nathan G.

      ..and I almost forgot my very first investment! It was a townhome for $67,000. I bought it with $7,000 down. Within two months the sewer backed up because of tree roots. I had to replace the sewer line and remove the at a cost of $6,000. One month later I received notice that a special assessment of $3,700 was due to the HOA. My REALTOR (and father-in-law) failed to tell me it was coming due. $10,000 in my first three months of ownership on a townhome that rented for $475!!!

    • Engelo Rumora

      Thanks for your comment Nathan and well done on your success

      It’s very important to take a ‘worst case scenario” approach before buying any property.

      if you can live with that, then the investment might be worth pursuing further

      Much success

  4. Frank Kocher

    As cash flow on a property increases, risk decreases. Each investor should review the risks and position themselves according to their opinions and their market. Reserves are essential in my opinion and could be either cash in the bank or an approved credit line. How much reserve is debatable. Enough reserve to pay for cleaning up a totally trashed rental or unexpected major repair (read replace roof) should be a minimum in my opinion. As you acquire more rentals , you can take from one property to pay expenses on another and this decreases your risk. Historically in California, houses have appreciated faster than income making saving for an entire all cash purchase price difficult. Astute management also decreases risk.

    • Engelo Rumora

      Thanks Frank,

      I’ve always believed that “safety comes in numbers”.

      The more properties you own (Especially without leverage), the more proof your portfolio will be to large sudden expense bills.

      The last thing anyone would want is to work overtime so they can cover losses in their real estate portfolio.

      Real estate should be about making more income and not having to work harder to cover losses.

      Much success

  5. Jamie Higdon

    Great advice! I do not agree with BRRRR without the reserves to back them up. Renovations and repairs are constant and expensive. I also don’t believe in stating or proclaiming the ROI until you sell that specific property. The scoreboard is irrelevant until THAT game is over.

  6. Mike McKinzie

    While buying ‘all cash’ sounds well and good, if everyone did that, 90% of the people who are investors today would NOT be investors. On the other hand, being over leveraged can be ‘investment suicide’ as well. So where is the happy ‘middle ground’ here? I own 25 rentals and 21 are ‘free and clear.’ But how did I start, all those years ago? I bought a rental where the owner carried 100% of the purchase price. Yes, the owner carried the entire sales price, but with the caveat it was all due and payable in ONE YEAR. In that one year, I put $5,000 into repairs/upgrades and a year later, I sold it for $20,000 more than I paid for it. That was around 40 years ago when $15,000 meant something.
    Therefore, we need some ‘rule of thumb’ to follow when financing property. If I were starting today, I would make sure that my Principle/Interest Payment would never be more than 50% of the rent I collect. For example, if I am receiving $1,000 in rent, then I wouldn’t want my payment to be more than $500. At 5%, that would equate to about a $93,000 loan. If a lender required 25% down, that would be a purchase price of $124,000. This requires the buyer to put down $31,000, serious ‘skin in the game.’ But a lot less than having to put the full price of $124,000 down!! But, these is still NOT a good deal, it is just an example of how to judge whether financing or all cash is good or not. This deal would only equate to about a 5% Cap Rate and REIT’s do better than that. So there better be some appreciation to offset the low return.
    This is an excellent blog, but as others have posted, not one size fits all when it comes to investing in Real Estate. Bottom line, make sure you have plenty of reserves as I have had to install new roofs on 5 of my 25 rentals this year alone. Those five houses will have a negative cap rate in 2018 but they were positive for the previous 10 years, so it just goes with the territory.

  7. Dave Rav

    Thanks for the post, Engelo. I dont always agree with your opinions and perspectives, but I must admit I absolutely LOVE your bluntness and directness. Its great!

    As for this article, great points raised. For all the newbies out there, the vast majority of your article only applies to rented out properties. If an REI is doing another strategy, say flipping, then they likely wont experience this.

    As for the comment about owning several properties free and clear from the outset, I would surmise 3/4’s of all those folks just starting out cant afford this. This number is probably higher actually. I want to challenge your assessment and say that folks could maybe buy their first two properties with 50% mortgages. That way they dont need to find or save so much cash, and yet (if calculated properly) their monthly mortgage payment is low enough to stomach some bumps along the way. Another option when starting out is buying free-standing mobile homes in (cheaper since no land to be bought), instead stick-builts. Lower entry-point cost. The only issue here is there is a major cost NOT under your control – lot rent. The landowner or park can raise your rent, or make future changes to the lot lease, which are detrimental to your investment. Otherwise, I think these are fabulous ideas for those starting out.

    • Engelo Rumora

      Thanks for your comment Dave and kind words,

      I never claim to be right or wrong lol

      I just love sharing my perceptions which are based on my experiences and opinions.

      If beginner investors can’t prove to themselves that they can save $50,000 – $100,000 before starting their real estate journey, then they have no place in real estate at all.

      I have found too many folks wanting “something for nothing” and looking for an easy way…

      Success in real estate take hard work and sacrifice and if you aren’t willing to work hard, you will probably fail.

      $50,000 – $100,000 in the kitty is enough “cheese” to try almost any strategy.

      That amount especially goes a long way in the Midwest.

      Just my opinion off course.

      Thanks again and have a great day

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