Season 1,

19: How to Lose Money Through One Bad Tenant with Michael Blank

January 31, 2017

Michael Blank is a full-time entrepreneur, investor and coach who is passionate about helping others make their first apartment deal and get out of the rat race. Besides investing in multi-family housing, Michael also provides training and consulting services via TheMichaelBlank.com; helps students acquire apartment units; writes for Bigger Pockets and FlipNerds REI Classroom, hosts the popular Podcast Apartment Building Investing w/Michael Blank. He lives in Northern, VA with his wife and 4 children.

In 2011 Michael had been a full-time entrepreneur for about 6 years. He had been particularly invested in building restaurants, where he both gained and lost a lot of money. He was also flipping houses and then an apartment sort of fell into his lap. This was Michael’s first multifamily investment and was not altogether a positive experience. In the end, what he learned positioned him so that he could not only improve himself but be of great help to others having similar experiences.

GREEN FLAG: FIRST MULTIFAMILY BUILDING

I had been financially stable for 2 or 3 years and was actually in a semi-retirement state, which allowed me to dedicate time to other activities such as flipping houses. I was flipping about 15 houses per year and doing well, when unexpectedly, one of my wholesalers offered me a 12 unit apartment building. I knew the rents were a little under market and I felt perhaps it was a calling to get my rear in gear and get into multi family which had kind of been in the back of my mind on hold.

I am very analytical so I did my research and saw what appeared to be a good deal. At that time I had already attended apartment seminars and studied about 150 apartment deals and learned better ways to analyze them. Ultimately I felt multi family was where I should be, but just had not gotten into it yet. This opportunity was inviting.  I had a team of experts. I had some knowledge and experience. I had the energy so I felt pretty good going into it.

RED FLAG: THE BAD TENANT

Things started out rocky and continued that way. The building wasn’t in a ready-to-sell condition, it took about 6 months just to work out the details so we could close. There was a 20% vacancy and some of the other renters were not paying their rent. And of course we had to deal with the 4-5 units that were in bad condition, put on a new roof, etc. and those renovations cost around $50,000.

Once we closed the real fun began. We had been dealing with rent collections and working on the renovations when we started having difficulty with one tenant in particular. Instead of talking to us, he would call the local building inspector’s office. And of course every time the inspectors came out they would find something wrong. One of the things that was wrong was that in Washington DC you need permits for everything, even to just change a light fixture. We learned that we weren’t getting those permits properly since they must be pulled by a licensed contractor. The tenant for some reason did not like the new the system of handling repairs very well and was calling and emailing the inspectors repeatedly which caused the situation to escalate.

Eventually we were called in for an official meeting. When we attended I was not sure what we were there for exactly. In attendance were the local inspector, the inspector’s boss and the governmental agency.  I was with my proper management and my contractor. They are basically asking us what in the world is going on over there! At the end of that meeting we found they were fining us $25,000 in various fees.

At the same time, the tenant was suing me in housing court on several different housing issues, for thousands of dollars. DC is very tenant-friendly, so all they have to do is fill in a form for that sort of thing, the city certifies and mails it for them and it does not cost them anything. To top it off, the tenant had contacted the people from the Department of Energy & Environment who started visiting to investigate about concerns over lead paint. Since some of those laws are vague they just cite you for everything. On the bright side, at the end of the day I had the most compliant apartment building in DC.

BLACK FLAG: A PATTERN

I had owned the apartment building for about three months and I was in court every few weeks when I started noticing a pattern: the tenant would call inspectors, we would fix the problem, and then before very long he would be calling them again. It wasn’t just about the actual problems, he was inciting the other tenants and organizing them. It appeared that there was something else going on, almost as if he were out to get me.

I was spending at least $6,000 per month just in permits. I knew that if this went on for even three more months I was going to lose all my money and the apartments; Much longer and I would have to just hand the keys back to the bank and give up.

WHITE FLAG: LOST SLEEP

I had trouble sleeping and I was very anxious. It was incredibly stressful! I had investors I was reporting too and was having to admit to them that I was not even close to the goals I had projected in returns. No money, no distributions and I had already spent my reserve of nearly $35,000 because of repairs, permits and other unforeseen problems. I had to explain the problems I had been having and let them know there was a possibility that I would need to ask for more money.

I could hardly sleep at all and at one point I felt sure this was the biggest mistake I had ever made and I wished that I had not left my business of flipping-houses. I began to wonder if I would have to go out and get a job again.

CHECKERED FLAG: MIRACULOUS MERCY

Normally when I hit this kind of a crisis, rather than getting freaked out, I try to think to myself “what’s the lesson to be learned here?”. So I told myself it was time to calm down. With continued reflection, I could see how God had allowed me to be in this mess for a reason. I also believed that He was going to enable me to figure out how to resolve it. With His help I could stay calm in the middle of the storm…..so I just kind of let go and threw myself into the hands of God. It was like a physical weight was actually lifted off my chest finally felt at peace and was I was able to sleep for like 10 hrs. straight.

There was still another informal hearing coming up. The tenant’s complaints were so ridiculous this time that even the Judge asked the tenant if he was being serious. The tenant asked for a private talk with me…..and this was after I had tried every way I knew how in the past 3 months to talk with him! So now he puts out his hand and shakes mine and I don’t even know exactly what we talked about, but after 5 minutes or so when the judge came back in, the tenant asked to dismiss the case against me. My property manager gaped and asked what in the world I had said to the tenant!

Then before I know it I am sitting in the downstairs coffee shop having a conversation with this tenant as if we were longtime friends. I was just blown away! So we talked there for about an hour and it is hard to describe the conversation. At one point I asked him about the back rent he owed and basically he said I didn’t have to worry about him anymore, that there would be no more issues on his part. And then he simply stopped calling the inspectors and there were no more problems…..NONE! To this day I have no real idea why he did any of what he did. But I think it was a miracle. Maybe because I surrendered the whole situation to God, He was saying here I Am! Lesson learned, that I am not in control and I needed to have given that to God all along. That was a very clear message to me.

Things always happen for a reason, and it’s hard to see that clearly when you’re in the pit. But when you look back on the situation you can better see some of the purposes.

FAILING FORWARD

In each episode of How to Lose Money, we ask our guests to answer a few questions about failure. Here’s what came out of this episode:

  • Why did this failure experience happen to you?

I don’t know. I am not in charge. I think it happened because every person is supposed to grow, and we grow when we go through challenges.

  • What’s the single most important lesson you’ve learned from this?

I think the lesson is that you do the best you can. Even with a bad deal like that it still worked out in the end. It was a massive failure on one hand, but it also made me the person that I am today.

  • How do you protect yourself from failing in this way again?

I could not have foreseen this particular situation. But do be sure you have the right people working for you and appropriately dealing with your tenants. That makes a big difference. Educate yourself and have people who support you around you.

  • Who do you turn to when you need help?

I listen to podcasts, I read books constantly. My wife’s intuitiveness and support is key. I also get a lot of guidance from prayers and reflection.

  • What advice would you give to someone in a similar position to yours?

You have two options: throw a tantrum or accept the situation. Worry is a useless emotion. You cannot control everything. The only healthy thing you can do about it is ‘choose’ to be at peace regardless of the circumstances. Then you can act and make good decisions.

This episode is based on an interview with Michael Blank from themichaelblank.comTo hear this episode, and many more like it, you can subscribe to How to Lose MoneyIf you don’t use iTunes, you can listen to every episode here.

Quotations:

Paul Moore: linkdin

Josh Thomas:linkdin

Leave a Reply

Scroll to top