Eviction Costs in Apartment Underwriting: Budgeting for Non-Paying Residents
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Every apartment owner meets a resident who stops paying. The cost of that is more than the unpaid rent. While the case moves through the courts, the unit earns nothing. There are filing and service fees, possibly attorney fees, the turnover work after the resident leaves, and any damage the resident caused. The time it takes depends on the state and the court's calendar, and a sponsor should not assume a fixed number of days. Underwriting this cost is ordinary work, and it belongs in the operating budget and the reserve.
This guide explains how to build an allowance for bad debt and eviction costs, how to estimate what one case costs and how to show the range to investors. It is not legal advice on eviction procedure. Use a local attorney for that.
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What does an eviction cost?
- Lost rent from the first unpaid month until the unit is re-leased. This is often the largest item, and it depends on how long the case takes.
- Unpaid rent the resident does not pay, which may never be recovered.
- Court and filing fees, service fees for the notice and the summons, and any fee for a writ or a sheriff's visit.
- Attorney fees, if the owner uses a lawyer. Some owners handle small cases themselves, but a mistake in the process can restart the clock and add cost.
- Turnover cost after the resident leaves: cleaning, repairs, locks, paint and marketing.
- Damage beyond normal wear, which the deposit may or may not cover.
How do you set the bad-debt allowance?
Start with the property's collection history: the last two or three years of rent billed, rent collected and write-offs. Divide the write-offs by the gross rent billed, and that is the observed bad-debt rate. Use a rate that includes a normal bad year, not the best one. Then compare the rate with the market, using the rent comparables and any local data the property manager can show.
A common approach is to underwrite a bad-debt allowance as a percentage of gross potential rent, then test a higher rate in the downside case. The number must come from the property, and the sponsor should explain it in the plan.
Hypothetical example
These figures are made up for illustration. Use the property's own collection data and local attorney quotes.
A 60-unit building has gross potential rent of $1,080,000 a year. Its last three years of write-offs average 2.5 percent of gross rent, which is $27,000 a year. The owner models a cost per eviction of $7,500, made up, covering lost rent during a case, fees and a short turnover, and expects about two evictions a year.
| Item | Yearly amount (made up) |
|---|---|
| Bad-debt allowance at 2.5 percent of gross rent | $27,000 |
| Eviction cost, two cases at $7,500 | $15,000 |
| Downside case: four cases at $7,500 | $30,000 |
The bad-debt allowance and the eviction cost overlap, so the model should not count both in full. In this example, the owner underwrites the allowance as the main line and uses the case cost to test the downside. The plan shows investors that a bad year with four cases costs about $15,000 more than the two-case base.
How do screening and the lease reduce the cost?
Screening reduces the chance of a bad case, and a lease that sets clear payment and notice terms helps the owner act early. Screening has legal limits, including the federal fair credit reporting rules, so follow the adverse action steps described in the tenant screening guide. Fair housing rules also apply to who you accept and reject.
Early collection, a clear late-fee policy and a timely notice reduce the length of a case. Count the savings only after the property's records show them.
What should you check before you commit?
- The local eviction process and its timing, from the local court or a local attorney.
- The owner's collection history and the write-off records, with the aged receivables report.
- The lease language on late payments, fees and notices, which must follow local law.
- The insurance policy, which may not cover unpaid rent.
- The cost of the property manager's time for each case.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). The deal's operating budget shows the bad-debt allowance and the downside case, so investors see the assumption and the range. DoorRaise does not handle evictions and does not give legal advice on them. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
Start with a sponsor page or see the fees.
FAQ
How many evictions should I expect?
Use the property's own history and the local market. A new owner should not assume a rate without the records.
Is an eviction a cost I can recover from the resident?
Sometimes, through a judgment. Recovery is uncertain, so do not count it as income in the plan.
Should bad debt go in the operating budget or the reserve?
It goes in the operating budget as an allowance. The reserve is for capital work and for a bad year beyond the allowance.
Do I need a lawyer for every eviction?
Ask a local attorney how the court process works, and decide how much of the case the owner can handle safely. A mistake in the process can cost more than the attorney.
Sources
- Rent delinquency and collections in apartment syndications, for the collection process before a case starts.
- Tenant screening and FCRA adverse action notices for apartments, for the screening rules.
- Apartment turnover cost underwriting, for the cost of getting the unit ready again.
- Example figures are hypothetical. No court timing, attorney fee or local eviction rule is cited here. Check your local process with an attorney.
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.