I have thought about evicting him because he never pays his rent on time anyways, but if he is mentally unstable, I know there are laws in CA protecting his rights, so I'm not sure how to go about this.

At least from the buyers perspective to add a protective element.2) Moving on is sort of complicated depending on how your agreement was drawn up.

Should we start an LLC for protection and purchase the property under that LLC?  

@BJ @BJ LaVelle we also do landlord protection, so yes I have seen an some companies.

YOU DO a WALK Thru with condition sheet within the first 2 weeks of ownership, WHY your protecting  your asset.Now with no walk thru condition sheet your basically out in the cold.

On another note, if you are looking to have access to some of the retirement funds without having to pay taxes, you could open a solo 401k plan, which can be directly invested in real estate, and then you can borrow some of the solo 401k funds.Following are the similarities and differences between the solo 401k and the self-directed IRA.The Self-Directed IRA and Solo 401k Similarities Both were created by congress for individuals to save for retirement;Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;Both allow for Roth contributions;Both are subject to prohibited transaction rules;Both are subject to federal taxes at time of distribution;Both allow for checkbook control for placing alternative investments;Both may be invested in annuities;Both are protected from creditors;Both allow for nondeductible contributions;Both are prohibited from investing in assets listed under I.R.C. 408(m); andNeither may be invested in your own business.  

Is there a way to protect yourself? 

I had this situation come up with my investment before because I bought it under my name for financing purposes and wanted to switch to LLC to protect myself and help with upfront taxes.

But if you have doubts, it's a good way to protect yourself in the future. 

That way I can still protect the Seller as best as I can.