Many popular books on building personal wealth advocate residential real estate investments. The idea is that becoming a landlord by purchasing multiple properties and leasing them to renters creates a regular passive income over time. However, most landlords would laugh at that idea, as the job can often be the opposite of “passive.” Handling property maintenance, unexpected repairs, payment issues, and problem tenants are frequent sources of landlord headaches. However, the idea of “cash for keys” aims to simplify at least one aspect of the landlord role.
Cash for keys is a written agreement for a landlord to pay a tenant a sum of money to move out. This agreement may help to avoid a drawn out and costly eviction, which can involve attorney fees, court fees, and even law enforcement. Lenders and borrowers may also enter a cash for keys agreement during property foreclosure. The amount of money in a cash for keys arrangement is usually several thousand dollars to cover the cost of moving.
Cash for keys is an alternative to eviction. Instead of beginning what can be a lengthy and heated eviction process, property owners offer to pay tenants a sum of money as an incentive to move out by a certain date. In the long run, many proponents find cash for keys to be less costly and more time-efficient than a formal eviction, which can end up involving an attorney and even law enforcement. Really, it can be a win-win situation, as the tenant receives money the help with relocation assistance and the landlord gets the tenant moved out quickly.
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An eviction notice usually starts off the cash for keys process — the rental property owner stops receiving rent payments, so they ask the occupants to leave the property. If your tenant fails to pay rent, you might have a hard time paying your mortgage. This could lead to issues with your credit and affect your ability to qualify for commercial real estate loans or blanket loans in the future, so you may decide it’s time to move on to another tenant. Landlords will not always be the first to offer a cash for keys agreement, but tenants can request one. If the landlord offers to create an agreement, both parties decide on a move out date and then sign it. The tenant usually agrees to maintain the condition of the property before leaving the premises and also do a quick clean before moving out. State laws and local laws may differ depending on where you live, but this arrangement is legal in all 50 U.S. states.
Figuring out how much money to include in a cash for keys agreement can be a challenge, but there are a few options. First, you can figure out how much court fees would have cost you and offer that amount. You may not be saving much money, but you’ll deal with significantly less hassle. Otherwise, you could agree to pay one month’s rent, or half of a month plus their security deposit. The cost of living in your area will also help determine the amount, so the cost of cash for keys in California may be significantly higher than if you’re operating in the Midwest, for example.
If you’re receiving money in a cash for keys agreement, keep in mind that it is taxable. So you have to pay taxes on the money since it’s considered income. We recommend saving 30% to 40% of the cash you get for tax purposes.
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Cash for keys deals are legal in all 50 United States. In fact, these transactions are often encouraged to reduce the number of rental dispute cases in the court system. However, it’s still important for real estate investors to ensure their lease contracts are in accordance with local regulations and that tenants are given appropriate notice and grounds for eviction.
If you own a rental property that has some form of rent control or rent stabilization, there may be some additional hoops to jump through, though offering cash for keys is still possible. For example, you may need to formally notify renters of their rights or allow a grace period when a renter may renege on a cash for keys deal.
Though the goal of cash for keys is to evade the palaver of a traditional eviction process, there still might be some conflict involved. The following advice can help you minimize the drama and ensure a persuasive presentation.
If you aren’t sure where to start when creating your cash for keys agreement, the National Association of Income Property Owners has a free form you can use. You can fill in the form directly and print it off for both you and your tenant to sign.
One of the most important elements of a successful cash for keys transaction is specificity. Make a very clear offer, outlining payments and dates in a fashion that is simply understood to avoid any confusion or misinterpretation. Make sure everything is properly recorded and consult an attorney if necessary.
Property management is hard. It’s even harder when dealing with a problem tenant or time-sensitive eviction related to a property sale. Cash for keys can incentivize renters to move out quickly, thereby saving the property owner potential legal fees, months of lost rent, and repairs. Additionally, cash for keys offers value in terms of saving time, conserving resources, and reducing hassles for the landlord and property owner. Before consenting to pay a cash for keys deal, remember to consult your attorney and put all agreements into writing, signed by both the property owner and the tenant.
Cash for keys is not only an agreement between landlord and tenant. Sometimes, cash for keys can be used when real estate is facing foreclosure by a mortgage company because the owner is no longer making mortgage payments to the lender. Like eviction, the foreclosure process can be long and dramatic. Before the real estate is foreclosed upon and the mortgage lender transfers the deed, the lender can offer the homeowner of the foreclosed property a cash incentive for vacating expediently and turning over the deed. Offering cash for keys can help the mortgage lender in a foreclosure sale avoid retaining a foreclosure defense attorney, involving the police in an unlawful detainer, and even going to court with the homeowner of the foreclosed home.
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This article was originally written on December 2, 2019 and updated on February 3, 2023.
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