This is causing a huge influx of people moving here for jobs.

When there's tenants already occupying the property, there's often times different leases that were signed among the tenants.Additionally, renting by room usually sees higher tenant turnover which in turn causes more work for the PM.Other challenges to consider:- Disputes/conflicts among tenants (different personalities if a tenant doesn't know the others prior)- Occupancy limits- Splitting utilities (what if someone uses more water?)

I can understand the temptation of wanting more rent from your multifamily home however I would add this to your train of thought:What would happen if your tenant in your illegal basement unit burned down the house which caused another tenant to get hurt or even die?

BUT, the might cause more issues because 550k is already on the small side for a 5+ unit building product. 

What is the legal procedure to seek money for damages caused to the property after they vacate.

It won't impact the rental side but will cause issues on the rehab progress and permit nonsense instructed by the city. 

Cause if he learns bad habits now, like living above his means or not saving, they'll be hard to break.

A good PM will have a 30 day, no cause termination policy.

I think due to the rapid expansion during the pandemic that caused housing prices to skyrocket mixed with interest rates, no one is able to successfully do an LTR (unless you BRRRR but even then numbers are tight).

Padsplit residents can cause problems with neighbors and other residents because many have substance abuse and/or criminal histories.