The practice known as “Cash-for-Keys” has become more prevalent within the last couple of years. It is the notion that a landlord or prospective buyer offers a tenant a certain amount of money in exchange for delivering the unit vacant. The amount a tenant accepts ranges – depending on various factors: whether the tenant has dependents, is disabled, and/or the number of years the tenant has occupied the unit. It is important to note that this is a voluntary choice – the tenant is not required to accept the money and/or deliver the unit vacant.

The first piece of advice I recommend determining whether cash-for-keys makes sense for you is to evaluate the situation as a business decision rather than an emotional decision. Owning property is similar to running a business and should be treated as such. Most property owners elect to forgo “cash-for-keys” option because they like their tenant and they do not feel the tenant deserves to be displaced.

However, for the sake of this blog post, let us look at it as a business decision – taking out all emotional ties. Most investors want to make a healthy profit margin on their investment – so I will provide you an example below.

Example of Cash-for-Keys

If a tenant is paying $1,000 for a 2bed+1bath and the market rent is $2,000, then the potential gross profit year-over-year that a landlord is losing out on is an additional $12,000. Now if it costs $20,000 to relocate the tenant and $30,000 to renovate the unit, we are looking at an investment of $50,000 with a $12,000 return. This comes out approximately 24% return on your investment. Not to mention the additional $100,000 you will add in value to the property by achieving a higher rent and gross income. From a business perspective, it is a sound decision to approach the tenant for cash-for-keys. From an emotional perspective, you might cringe at the idea of giving a problem-tenant $20,000. That tenant can potentially make your life a living hell if he/she chooses to not accept your cash-for-keys proposition.

You might say to yourself, “Well, I’m not looking to sell my property, why do I need the additional $100,000 in value?” And you are right, in that situation, it probably does not make sense to approach the tenant for relocation. Every situation is different and there is not a cookie-cutter solution.

Give us a call and we can brainstorm ideas and create a game plan catered to your specific circumstances.