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Why the True Cost of an Eviction Is (Much) Higher Than You Think

Why the True Cost of an Eviction Is (Much) Higher Than You Think

Evictions suck—for everyone. They’re bad for the property owner, the tenant, and America as a whole. On the lowest end of the spectrum, evictions cost Americans over $14,000,000,000 (that’s BILLION) per year. With this massive sum spent on court fees, attorneys, moving trucks, and lost rent, how do we STOP evictions before they happen? What can landlords do to ensure they NEVER have to kick out another tenant for nonpayment? Today, we’re discussing the true cost of evictions and how to avoid them.

We’ve brought our own Market Intelligence Analyst, Austin Wolff, back to the show to share how much evictions cost for the landlord, how much they cost to the tenant, and how much they cost society. We’re breaking down which costs hurt real estate investors the most during the process and how long it may take you to get a non-paying tenant out of your house.

Once you’ve been seriously sticker-shocked by the price of an eviction, James brings us some actionable steps he uses daily to avoid evictions at his rentals. He recently had one of the worst evictions, costing him SIX FIGURES. He shares what to do so this DOESN’T happen at your investment property, plus the type of rental you can provide that attracts the highest-quality tenants

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
What is the most expensive eviction you’ve ever had to deal with

James:
Coming out of the pandemic? Actually I lost about $175,000.

Dave:
What?

Austin:
There’s an estimated 2.7 million evictions filed every single year.

Dave:
The question I get is, should I lower my standard for tenants? Hey everyone, it’s Dave. Welcome to today’s episode of On the Market. For this discussion, I am joined by my friend James Dainard. James, thanks for being here.

James:
Thanks for inviting me to this pleasant conversation. Dave. I mean, I’m excited to talk about evictions.

Dave:
Yeah, I mean, it’s not a pleasant conversation, but it is sort of just an unfortunate reality

Speaker 4:
For

Dave:
Real estate investors and it’s an unfortunate reality for tenants as well. No one wants to find themselves in this situation, but as of now, it’s still happens. And so I think the best that we could do as investors is figure out how to mitigate our risk of evictions and sort of minimize the impact that evictions have on our own investing and on the tenants that we’re working with.

James:
Yeah, it’s all about prevention. It’s no different than preventing property damage later. If you take preventive measures, proper screening, proper maintenance, your investment does better.

Dave:
Absolutely. And to sort of bolster our conversation here, we’re going to pair James’s tons of on the ground expertise with some research that our analysts at BiggerPockets here, Austin Wolff has done for us on eviction. He’s actually looked into and come up with specific numbers for what the average eviction costs for a property owner, for the tenant and for society as a whole. And I think these numbers are pretty eyeopening in the first place, but are also really helpful when deciding how to optimize and run your portfolio, how to price your properties, how to screen tenants, because once you have a dollars and cents figure that it could cost if you find yourself in a bad situation, it’s sort of at least I find it motivating to be more diligent on the front end and to take those preventative measures. Of course, after we talk to Austin about his research, James Austin and I are going to talk about some measures that you could take to prevent or mitigate these costs in the first place. So let’s bring on Austin. Austin, welcome back to On the Market. Thanks for being here again, happy to be here. This is great. You’ve been doing some amazing research for us and today of course we’re going to be talking about evictions and the broader cost of them for landlords, for tenants, for the broader economy and society. But I want to start with just some sort of grounding of this conversation. So James, I’m actually going to turn it to you. Can you give us some context around evictions? What is the most expensive eviction you’ve ever had to deal with?

James:
Yeah, evictions are not fun. Not only do they slow your deal down, you end up having to carry the property for a tremendous amount of time. But recently, the worst thing that I’ve dealt with with evictions, I’ve dealt with all different types of ’em, but coming out of the pandemic, actually I lost about $175,000. What on an apartment building that I had bought. This was a combination from the pandemic restrictions, but then also delays from the court since then. So I bought this property two months before the pandemic hit. It was a massive fixer 12 unit building. I bought it with hard money, so I’m paying 11% interest when I close on the thing. The plan was move everyone out, unsafe conditions in the building, no one should be living there anyways,

James:
40% of the tenants weren’t paying when I bought, so they were on their way out the door. It should have took us about three to four months to go through the eviction from there. But then pandemic hits, we don’t collect rent for over 13 months on this building. Oh my gosh. And hard money paying $15,000 a month. I think we’re collecting like 25% rent and I end up having to pay 70% of the tenants, five grand cash each just to leave and forgive them all their back rent to get them to strategically move them out. And I still have one tenant I’m going through right now that I’m now formally evicting. So it’s been over two years, two and a half years.

Dave:
Oh my

James:
Gosh. And I’m still getting her out and I have about another four months, and most recently she set the building on fire on accident.

Dave:
Oh my gosh. Wow. I think you’ve done some grounding for us there, James, in setting up what is hopefully the worst case scenario for a property owner there. Austin, maybe you could chime in, but I haven’t heard of a $200,000 eviction problem before. Hopefully that’s not the normal cost for property owners or for tenants,

James:
And the worst part is you can’t do anything during that time. You just got to kind cover the cash outlay, but it’s just long. It’s a long process and you got to kind of wither the storm. Now, good thing we bought value add and we’re still going to have equity in the building even with that negative 200. But yeah, enough fun.

Dave:
So hopefully we will talk about how to avoid these problems and then also how to lessen the sting when these unfortunate situations do come up. As you could see, they could be very costly on the property management side and we’ll get into the tenant side as well. So Austin, why don’t you tell us a little bit about how James’s story compares to the averages and what you’ve uncovered in your research?

Austin:
Yeah, James’s story is certainly I would say the upper bound of costs that one can expect to pay. It

James:
Sums up my life.

Austin:
Yeah, well, it’s such a great example of market choice and certain markets are more tenant friendly and certain markets are more landlord friendly. And throughout the research that I’ve done, there are legal fees, court costs, potentially share fees, but it seems on average by far the greatest costs that you’ll incur are the holding costs and then also potentially repair costs. There might be unfortunately damage to the property or you might just need to turn it over for the next tenant. So if we try to create an average across all markets, we are going to get a lower to middle bound of maybe two to three months of holding costs. Of course there are some markets where that’s going to be much larger.

Dave:
Okay, so let’s just define a couple of these terms. So when we’re talking about the monetary impact of an eviction for the property owner, we’re talking about like you said, what there’s court costs, there’s sheriff fees, so that’s what the actual process of eviction. You also mentioned repair costs or turnover costs when you actually regain control of the property and have to fix them. But you’ve mentioned holding costs and so holding costs, at least when I hear you say that, Austin, I assume that means the property is not generating revenue while this eviction process is going on, but as the property owner, you are continuing to pay things like your mortgage, you’re paying insurance, you’re paying taxes and other soft costs, operational expenses for your business, and for every month that the eviction goes on, those soft costs add up. Did I get all the variables there in terms of costs?

Austin:
Yes, that’s correct.

Dave:
Okay. And so it sounds like what you’re saying is that the biggest variable in how much an eviction costs is how long the eviction process takes.

Austin:
That’s what the research leads me to believe. I would love to hear James’s opinion on that as well.

Dave:
Well, James, I want to ask you in a second, but Austin, when you did your research, what is the range? What’s the short end in a market for how long an eviction might take versus a really long and drawn out process?

Austin:
Yes, there are certain states that are very landlord friendly. The process might take maybe three weeks at most to evict a tenant and again, in certain markets. And so I would potentially say that that would be a one month holding cost, but then you also have to market the property and get a new tenant in there as well. So maybe it’s one month to evict and then another month for I guess turnover. So I would want to combine those and say maybe two months might be maybe the lower bound of the amount of months that you’re going to be holding this property and incurring those costs.

Dave:
That could be very expensive depending on the market. That could be a couple thousand bucks, maybe up to $10,000 depending on how much rent you’re generating on one of these properties. So super high even on the low end. James, I’m curious for you, because it sounds like this story you shared with us at the beginning was a combination of tenant friendly laws, but also the unique circumstances of the pandemic plus backlogs and all these things. What is the process supposed to look like in Seattle where if you don’t know is where James invest?

James:
Yeah, so what it’s supposed to look like and what happens is completely different. In Seattle, it’s funny, if you actually research, how long does it take to evict someone in the city of Seattle, they’re going to come up and you’re going to say, well, you’re going to serve them with a 10 day notice where you’re giving ’em a 10 day notice on the door saying pay or vacate. Then it goes into a 14 day notice, then you file for eviction, you schedule through, and typically it should be about 45 day-ish.

Dave:
If

James:
Everything was going perfect,

Dave:
That doesn’t sound that bad. I mean it’s not great, but it’s not as bad as the nightmare you just shared with us.

James:
No, the issue being is once you file for eviction, you have to get a court date, and the court date sometimes can be up to a year out one year. And so you are waiting for that whole period of time to get in to see the judge so you can get this eviction pushed through. And if a tenant, depending on the market that you’re in, in these west coast cities, some of these other cities, the tenants know what their rights are and what they aren’t and they know how to drag this out. And the longer it is dragged out, the more expensive it is. In Seattle, my average unit is $2,500 a month and I’m losing 10 months of income. That’s $25,000.

Dave:
Is that your actual average 10 months of income?

James:
Typically it’s going to take me over 10 months to get the whole eviction done from the first, no, depending on the jurisdiction in the city. And each city is so different. Every state is not the same because city Seattle, it’s a lot different. Depends on time of year now too. What time of year is it is cold, you can’t evict anyone or ask someone to move if it’s cold, god forbid. And so now there’s all these extra restrictions that delay the process and that delays can hurt. And so it’s all about being preventative. That’s why I offered to pay people to leave from that bad building I had every month that went by was costing me $2,000 a unit per tenant that wasn’t paying. So giving them five grand now was a steal for me because it’s the whole cost. It’s not the cost of the attorneys, it’s not the cost of the fees, it’s not the cost of it’s how long do you have to hold it.

Dave:
Yeah. Okay. Well thank you for sharing that. That makes a lot of sense. So it sounds like the national, I’m just going to use round numbers, but the national rent somewhere around like 1500 bucks right now. Let’s just say that. So Austin, if it takes let’s say two months of vacancies, so it’s three grand in expenses plus all these other fees. So it sounds like four grand on the low end might be about right.

Austin:
Yeah, I’d be confident in saying four grand is probably the lower bound that one can expect.

Dave:
Wow, that’s super expensive. And I mean James just told us that 200 grand is the high end, but let’s just talk about a single unit that was 12 units. So Austin, what would you consider the high end of the range?

Austin:
High end of the range. Again, if we’re factoring in the markets where they have landlord friendly laws, I would say that we might be looking at maybe 8,000 for one unit. And again, that’s sort of like the higher range. It’s not an outlier so to speak. In James’s case,

James:
I run into outliers too much. I had one single unit also during the same period cost me over $60,000. A single unit. Single unit. Wow. Oh my god. And these are nightmares. This is not typical throughout the pandemic, throughout conception of us having units, we run like 94, 90 5% collection rate or higher. And so those are the nightmare weird stories. But yes, over 60 grand on one single family house.

Dave:
We do now have to take a quick break, but when we come back we get even deeper into how these numbers add up and not just for landlords but for the economy as a whole. So stick with us. Welcome back investors. I’m here with James Dard and Austin Wolf talking about the true cost of eviction. Let’s jump back in, we’ll come back to this a little bit later in the show. But James, I do just want to ask, is this something you then put in your underwriting when you’re considering deals? Do you assume for a larger property that you’re going to have to evict a certain number of tenants?

James:
No, because if you put out the right product and you target the right neighborhoods, we have very little issues collecting rents. It’s when you do, that’s where it becomes this kind of nightmare situation. Like the one also that I lost 60 grand on, I underwrote that in because when I bought the property, I knew I was taking on this tenant situation. And so luckily I offered at least a hundred grand less so even though I lost the 60, we did build it into our underwriting. We were expecting to sit on that house for being vacant for at least 10 to 12 months.

Dave:
So Austin, you said somewhere between four and eight grand is our range. So would it be safe to say six grand is the average cost you came up with?

Austin:
I think that’d be fine to say.

Dave:
Okay. So super expensive here. $6,000 on a single unit could make or break a year, maybe more than one year depending on the type of deal that you’re looking at. So obviously something you want to avoid as a property manager. And again, we’ll get to some preventative measures that you can take in just a few minutes. But I do want to turn to the other part of your research, Austin, which is that of course this situation and eviction is obviously a really bad situation for tenants as well. No one wants to be in that situation. So can you tell us a little bit about what the costs are for a tenant that gets evicted?

Austin:
Yes. Now if they have put down a security deposit and they are being evicted, they’re likely not going to get that security deposit back. So one can say that that might be a cost to the tenant. They might also incur moving costs. And according to Angie, which is previously known as Angie’s List, the cost of moving a rental unit, an average can be between $400 and maybe up to $3,000. I would say that maybe 1500 is a good number to use for total moving costs. On average, of course it might be lower than that depending on how much furniture you have and how far you’re going to move. And as far as calculating a range that a tenant might financially incur, as far as cost goes, I think depends on if we’re counting the security deposit and if we’re counting moving costs as well. Let’s say they’re just paying a thousand dollars on the lower end and they incur $400 moving costs on the lower end, then the lower end of the cost that they might incur might be 1400. And then if we go on the higher, higher end, maybe five grand depending on security deposit and moving costs. This is a point that someone brought up in the forums on BiggerPockets. This is if we don’t calculate the gain that they’re getting from not paying rent. So

Dave:
That’s interesting.

Austin:
Yeah, if we factor that out, those are the costs they’re sort of maybe coming out of pocket to pay.

Dave:
Okay. So just to make sure I understand, let’s just use an imaginary scenario where a tenant falls behind on rent for let’s say three months. So at the end of that eviction process, they might incur the cost that you just outlined here, a couple thousand dollars, but presumably they didn’t spend money for three months because they were falling behind on rent. So you need to factor that in as well. That makes a lot of sense. I actually read this book called Evicted by Matthew Desmond. I don’t know if you guys have heard this book, but it paints a very interesting just picture of the situations and sort of the really unfortunate situation for tenants and landlords alike when these things happen. And there are a lot of harder to quantify elements to tenant for landlords too, but for tenants like mental health, physical health, credit score, those things kind of add up in the process. Did you uncover anything there as well, Austin?

Austin:
Yes, there was a study published in 2022 in the Preventative Medicine Reports journal that did correlate evictions with a decrease in mental health unfortunately.

Dave:
Interesting. Yeah, and one of the things that sort of struck me about this book was that how these situations really compound for tenants and it can create this really unfortunate cycle where you fall behind on rent, you get evicted, your credit score gets lower, and so next time you go to rent to cover risk, landlords usually charge more or charge a higher deposit for people who have a poor credit score because they’re considered riskier, that makes it more expensive for the tenant, more likely for them to probably fall behind on rent again. And it creates this sort of negative feedback loop. So obviously as real estate investors, we look at the situation and it’s a huge disruption. It’s frustrating to cost to our business, but there is also sort of a human cost on the other side of it that we should recognize as well.

James:
Oh yeah, it will wear you down. Anybody involved if they’re on the short end of the stick, it is brutal. I mean you have to almost just come to terms with that. You can’t think about it. You just got to keep moving forward because it will suck the life at

Dave:
You. Yeah, it is a tough situation. And so it looks like Austin, based on what you were saying, the costs for landlords around five grand, if we factor in the saved rent with your estimates of the hard costs for a tenant, what would you estimate the average cost for a tenant to be?

Austin:
If we’re going to factor in saved rent, it might’ve been a net gain for the tenant overall. If they’re not paying housing costs.

Dave:
Interesting.

Austin:
But if we don’t factor that in and we’re just going to discuss the actual hard costs that they’re paying, I would say might just be $400 on the lower end. If we’re not factoring loss of security deposit as well, if we’re just factoring moving costs, it might just be $400 on the absolute lowest end, higher end, maybe $3,000 if we’re factoring in security deposit and moving costs as well.

Dave:
Alright. So yeah, really depends on the individual situation there. Given who the tenant is. One thing as a, I don’t know if I’m an economist, but I look at the economy a lot. I’m curious about is what are some of the other factors that impact the economy here? Because I think the easy thing for us to understand is through are these hard costs to tenants and for property owners, but a lot of times these types of situations that are disruptive to multiple parties can have these sort of other impacts on the broader economy or society. So I’m curious, Austin, what you uncovered there.

Austin:
Yeah, it can be hard to exactly correlate evictions with the downstream effects such as, okay, if a tenant has to move and they need to find a place, maybe they move in with a family member in the meantime and they might open up a self storage unit and maybe that sort of increases demand for local storage units in that area depending on how many evictions are happening and if tenants need to actually store their things in the meantime, there could be potential, a loss of property for the tenant if they don’t claim it, or God forbid they can’t afford to move their property, they might abandon it. So that could be a potential loss as well. And then there’s also damage to the credit score to the tenant, which can affect their ability to pay for things using credit cards or ticket loans or even potentially get a new lease. So this is one of those areas that is particularly hard to quantify the downstream effects, but they do appear to be present.

James:
And I think one of the biggest costs, at least for an investor side, that hitting cost that people don’t really think about. I mean there’s your standard, you hire an attorney, you post your notices, you go through your court docs, typically on average that’s going to cost us, I would say attorney fees like two to three grand in that range with postings. And then there’s the loss of rent. Well, it’s how many days is it delayed or how many months are you not getting paid rent times that by your income? So that’s easy to quantify too, but it’s the other things that can really screw up your investing. Even that property I bought with hard money, well that required me to lock up 20% down for a two year period where I’m feeding my investment every month. There is no gain happening at that point.

James:
As investors, we make money by velocity of money, how quickly can we put it out, rack return, bring it back in. So then instead in that scenario of me purchasing that property, rehabbing it like a burr and refinancing and getting my cash back, I thought I was going to have my whole down payment or a majority back within a six to eight month period, then it turned into two years. That can be detrimental for the return. And a lot of investors do buy with bad tenants or delayed tenants or tenants in eviction, but you have to factor these numbers in and you have to make ’em big because when you take a timeline from nine months to 24 months, your return just false. It drops dramatically. And so the cost of money is one of the biggest things. It prevents growth, it locks up cash and you cannot go buy something else and start growing. And that’s one of I think the biggest costs on investors is when your money’s sitting dead, you are not growing.

Dave:
Yeah. So that’s a great point, James. I think that’s super important to remember that it’s hurting you and that’s money that you could be putting into another deal to upgrading a different apartment. It just slows down everything. It just limits your resources and ties you up. And I’m sure the same thing is true on the tenant side. You could be putting that money that you are losing or using during the eviction process into small businesses or into community or are spending it elsewhere. Alright, time for one last quick break, but we won’t leave you without giving you strategies for preventing these costs in the first place. We’ll be back with that and more hidden costs on the other side of the break.

Dave:
Hey friends, welcome back to on the market. So it seems Austin, you have quantified for us what I think most people know instinctively is true, which is that evictions are really bad situations for landlords, they’re bad situations for tenants, they’re bad situations for the economy. So how do we avoid this? Do you have any recommendations you’ve uncovered that help stave off these situations in the first place? As James said, once you’re in it, it’s kind of just a really bad situation that you have to get through. To me, it seems like the way to avoid these costs are to not have a misalignment between a tenant and a property manager or property owner in the first place.

Austin:
Yeah, that’s a great question. I would say that this is particularly what I would say common industry knowledge when it comes to renting out to tenants properly, screen them, make sure you have minimum requirements, make sure that their income is a multiple of the rent three x the rent is one common metric that many people use a minimum credit score. I’ve seen six 50, I’ve seen 700 as a minimum here in Fayetteville, Arkansas. The absolute maximum minimum that you can check for is 6 25. You can’t actually make it higher than that for a minimum credit score. So it really depends on the area. And then one thing that you might want to do as well, if you can in your market is ask for references and hopefully try to contact previous landlords, make sure that the tenant understands the lease agreement and hopefully you have an excellent property manager as well. Yeah.

Dave:
James, what about you? In your years of experience doing this, how do you prevent evictions from happening in the first place?

James:
We’re in Seattle and there’s a lot of nightmare squatter stories, eviction stories, and yes, when it does happen, it is expensive. But how do you prevent that? Well, one thing that we’ve learned is if we are delivering a very renovated, nice product to the market, it doesn’t matter what price point, it doesn’t have to be expensive, it just the quality of building really matters and who you’re attracting as a tenant. Because if you have a place that you can provide that is high quality standard and that’s where people want to live, you’re going to get the better applications. So for us, by renovating and delivering that product, we’re getting the right people that apply. It’s also the target demographic that we’re shooting for. Most of our units are in downtown Seattle where we are offering a nice place to live, fully renovated. And it attracts a lot of working professionals in tech because we’re a renovated apartment building coming to unit rather than a new construction.

James:
So our rent costs typically, or what we’re offering are units for rent are about a dollar a foot cheaper than new construction if not more. And so we’re kind of attracting the entry level tech employees and because we have a nice place to live, we are not the most expensive and we take care of our building. People make their payments. I thought the pandemic was going to be detrimental. And again, we had like 92% collection rate during that time during the pandemic, and that included the buildings we had just bought and those were the ones that were really dragging us down. And so if you’re an investor that is constantly running into eviction issues, it might be what you’re offering offer a good place to live and you’ll get good people applying.

Dave:
Yeah, that’s good advice. I get this question a lot and actually one of the reasons we wanted to do this episode is things are slowing down. It’s not as competitive as it was, and at least in some of my experiences, it’s a little bit harder to find tenants right now than it was during the pandemic when it was super busy. And so the question I get is, should I lower my standard for tenants? Is it okay to get someone with a lower credit score or doesn’t meet that three to one ratio and well, I have my own opinion about it, but James, I’m curious what your opinion is before I tell you mine, if you’re looking for a new tenant and let’s say it’s sitting vacant for a month, would you lower your criteria for a tenant or allow the property potentially sit vacant for another month?

James:
I would let it sit vacant for another month. Right now I’m actually going through the exact same thing where I’m having an issue renting a property, and this is for a rent price that I achieved three years ago. So that’s a little for me. I would think it should be higher, right? It should have standard appreciation. And so instead of dropping it because my property manager suggested me to drop it, I said, no thanks. We’re taking the time to add some extra amenities and repairs to it to make sure that we can still attract that really good tenant. It’s not worth the money. You will spend more money sacrificing your requirements, then you will just hang it in there and keeping that rent and where it should be.

Dave:
Well, that’s sort of backed up by what your research shows Austin, because usually if you have the unfortunate situation of an eviction, it could cost you two, three, maybe even four times your monthly income rather than just the one additional month that you would get from another month vacancy, I guess.

Austin:
Yeah, it appears tenant selection is arguably one of the more important things in this whole process to preventing it

Dave:
For sure. Yeah, it makes sense. And I think that it’s important to remember the cost to the tenants as well, that if you’re putting a tenant and accepting a tenant into an apartment that they’re not, or a unit that they’re not likely to be able to afford or might stretch them, that’s not necessarily helpful because it might wind up in this even worse situation where they fall behind on rents, which is obviously not good for anyone as we’ve been talking about.

James:
And that’s why it’s so important for everyone to do their research on what the rental rules and regulations are for the markets that you’re investing in. A lot of people look for the analytics, they look for the growth, but also what is the process like right now? City of Seattle in the past 24 months has passed so many different regulations on even what you can require to ask about your tenant, potential tenant and that you in city of Seattle, the first qualified tenant that hits every one of your check boxes, you must rent to them.

Speaker 4:
You

James:
Can’t go, Hey, I got these five and out of the five, they’re all great and I like this one best. You can’t actually pick your own tenant if they hit all of your requirements. They’re the first one to apply. You have to rent to ’em. It is just so important for everyone to always research the new market that you’re going into. I just moved down to Arizona, I’m researching what is the application process, what is the eviction issues and what is the process for that? What does that cost? Because you do have to work that into your performa and also just how you’re running your business. If you’re a mom and pops operator and you’re picking the tenant and you’re not supposed to be like in Seattle, if you’re like, oh, I like this person better, so I’m going to go with them, which should be a natural, in my opinion, a natural right to do whatever you want with your own house. But you need to know these things because if you do ’em wrong, it can be expensive. You can get sued and it can delay things and you might get tenants that you really didn’t really want in your property in the first place. And so look at the regulations and the requirements as much as the metrics behind them.

Dave:
Yeah, that’s a great point actually brought me to my last question I wanted to ask you here, James, is what do you do when you’re inheriting tenants? I’ve been fortunate in that I’ve only ever had one eviction in my portfolio in 15 years and it was an inherited tenant. And I look back on that situation and I don’t really know what I could have done differently except maybe underwrite or set some money aside for a potential eviction when you’re taking over, especially a multi-unit. Do you have any advice on that?

James:
Yeah, so we buy a lot of tenants. I mean, that’s how we get a lot of goodbyes. I mean, for anybody looking for multifamily buildings right now with the cost of money and the cost of repairs, if tenants are not paying their rent, it’s a non-performing asset. And actually that’s probably the biggest value add that we’re getting offered right now. Some investors, some syndicator bought the property, it’s not performing. Property management is out of control. They’re going through a bunch of evictions, it’s taking forever. And they did not realize that it was going to happen in our market. They’re usually out of state investors, they’re dumping ’em off to us. And so how do we prepare for that? Well, we either underwrite cash for keys where we might even put in upwards towards $10,000 as our budget going. Hey, if we put $10,000 into factor for the cost of the eviction to move out or cash for keys, if let’s say we’re buying a 12 unit building, well that’s 120,000 that we’re putting aside. And then the first thing we do isn’t push the eviction forward or try to save the money. We go offer the money like, Hey, because if I go to you Dave, and you’re paying me $2,200 a month or was and now you’re not paying me. And they go, Hey look, I just bought this building. How about we break up? Here’s $10,000 if you can move out by the end of the month

James:
Because we’d rather overpay them and get them moving out. But yes, so typically we’re putting at least six months of rent inside of our proforma as a cash out of pocket expense. And as long as we cover that expense and we adjust for the timelines, you can still make the deals pencil up.

Dave:
Alright, well this has been super helpful for both of you. I appreciated, and hopefully everyone here just understands that this situation is rough for everyone involved and hopefully by knowing the true expense and costs and how impactful, negatively impactful it can be on your business, that everyone should be motivated to try and avoid these situations. Austin, do you have any other last thoughts from your research before we get out of here?

Austin:
One thing that I just wanted to bring up was the total impact on the economy. If we sort of sum the costs that the landlord incurs and the costs that the tenant incurs, we just sum them up together, bundle them together. If we take say an average of five grand costs to the landlord and maybe we just say that we’re doing the lower bound on the tenant of $400, okay, we have a total cost between the landlord and the tenant on average $5,400. Well, there was a study that was released recently that said that there’s an estimated 2.7 million evictions filed every single year. So if we multiply 2.7 million by let’s say the average of 5,400 total cost between landlord and tenant, that gets us an estimated minimum negative impact of about 14 and a half billion dollars on the economy each year. Oh my God. And that’s a minimum, that’s a lower bound. So it really does suck for everybody when this occurs. So I do think to your guys’ points that screening for tenants and making sure that you have the right people in your property is the most ideal situation.

Dave:
Alright, well thank you both for talking about this interesting and unfortunate side of our industry, but bringing this stuff to light hopefully will help everyone make better decisions to optimize your own portfolio and fine tenants that are good match for the product that you’re offering as James and Austin have recommended. We do. Thank you both and thank you all so much for listening to this episode of On The Market. We’ll Be Back in a Few Days On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

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In This Episode We Cover

  • The astronomically high cost of evictions in the United States
  • How long evictions usually take, and why they often drag out months (or even years)
  • The cost of an eviction to a tenant and the fees they have to pay once they’re forced to leave
  • How to avoid evictions from the start by following some quick tips from James
  • The key to maintaining a high rent collection rate in your rental portfolio (fewer evictions)
  • What to do if you inherit tenants you suspect WON’T pay once you purchase the property
  • Overall economic impacts of evictions and why we MUST reduce them
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.