Managing rental properties can be a profitable business as long as you manage your cash flow well and collect rent on time. In fact, the biggest factor in your cash flow will be your ability to collect rent on time.
Stereo-typically, renters are not the most fiscally responsible people. Whether this is true or not, at one time or another you are bound to have a tenant who pays rent late – or not at all.
Here are seven tips for collecting rent on time and handling tenants who have trouble paying rent.
1. Make it Automatic
Requiring tenants to pay rent via an auto-pay or auto-deduct system is the best way to collect rent on time. There are even multiple systems that will deposit the money automatically to your bank account. The major benefit is that this eliminates the factor of human error – i.e. tenants “forgetting” to pay rent.
There are multiple ways you can set up automatic rent payments:
Use an ACH (automated clearing house) to withdraw money from the tenant’s bank account. To authorize this transaction, the tenants sign a document that allows the landlord to withdraw a set amount of money on recurring basis.
Cozy uses ACH direct deposit systems to deduct the tenants rent money and deposit it to your bank account.
The downside is that if a tenant doesn’t have enough money in their account to fund the withdraw, the draft will bounce, and you won’t get paid. ACH systems usually cost $.50 – $3.00 per transaction and take 4-7 days to process – so it’s not the quickest solution for collecting rent – but it is the easiest.
Online Bill Pay:
All major banks have an “online bill pay” feature. If you don’t want to set up an ACH, you can ask your tenants to set up their rent payment as a recurring bill with their bank. This way, the bank will issue a check and mail it to you automatically every month.
The downside is that you still have to deposit the check, and payments could get lost in the mail – albeit, the bank is mailing the check, not the tenant.
Collect Post-Dated Checks:
Prior to the invention of online payments, some landlords would collect 12 post-dated checks – one for every month of a year-long lease. Then, the landlord would simply deposit the check on the first of every month. It’s pretty simple, but most tenants I know are uneasy about writing 12 post-dated checks – especially to a landlord they just met. Remember, it’s illegal to cash a check before the date mark.
2. Choose Your Tenants Wisely
Only rent to qualified tenants with a great rental history. No surprise here, right? When screening tenants, you will see the entire gambit of credit ratings. Some prospective tenants will have an excellent history paying bills, but others will have downright terrible payment habits.
- Set your Criteria: Start out by being very clear about the criteria prospective tenants must meet to pass the application process. Discrimination laws state that you much hold the same standards and criteria to all tenants. If you deny an applicant for having $50,000 in credit card debt, you must deny all applicants who have $50K or more in consumer debt.
- Income Requirements: At the very least, this should include regular income equivalent to three times the rent amount or more, and an established history of paying rent on time with past landlords.
- Good Credit: Landlords and property managers should always obtain an up to date consumer credit report, which usually doesn’t include rent payments, but does include eviction judgments and past debts. You will also discover how they’ve been paying other creditors.
- Check References: I believe that the best predictor of future behavior is past behavior. Therefore, thorough verification of the application information is critical to paving the way for prompt, full rent payments. Always call the previous landlord and ask “would you rent to them again?“. Keep in mind that a previous landlord does not have to tell you anything, but it doesn’t hurt to ask!
3. Exercise a “No Cash” Policy
Accepting cash as a rent payment is never a good idea. I know it’s tempting, but as I discuss in the article “Danger Danger, Be Cautious of Cash“, just don’t do it.
Cash is too easily lost, leaves no paper trail in the event that your tenant disappears, and may sometimes imply that your tenant is involved in illegal business activities.
You can eliminate these risks by establishing a policy in which you do not accept cash as a payment for rent.
Serve a legally sufficient notice of your “no cash” policy and advise your tenants of acceptable ways they can make their monthly payments, such as check, money order or direct debit. Remember to communicate this policy in your lease or rental agreement.
4. Enforce Your Rent Collection Policy
To ensure regular, timely rent payment, keeping your collection policies firm and consistent is the industry best practice – but there are few exceptions.
In your lease, you should address all payment related issues including the:
- exact amount due every month
- where payments are made
- acceptable payment methods
- when rent is due, grace periods
- the consequences of bounced checks or default.
At one point or another you may feel sorry for a tenant falling on hard times, or simply be in too much of a hurry to charge a late fee. If you are sure that a good tenant is only experiencing a “just this once” type of issue, feel free to cut them some slack.
However, to keep them from taking advantage of your generosity in the future, be firm about your policy from then on and don’t make a habit of being lenient. Let them know that rent should always come first in regards to paying bills and that their delinquency results in costs that will be passed on to them. In a previous article, we suggest forgiving a late fee once, but ONLY once.
If you are so short on time that you cannot adequately collect rent or late fees, then consider hiring a reputable property manager to do this for you.
5. If they are Late, Ask the Necessary Questions
When you come in contact with the tenant who has yet to pay rent for the month, ask them a few questions that will clue you into the heart of the issue.
- When do you expect to make a payment?
- Where will you be submitting your payment?
- What is the exact amount that you will be paying?
- What will be your method of payment?
- What is the source of income you will be using to make your payment?
If they are evasive in answering these questions, serve them with an eviction notice the next day. You can only serve an eviction notice if they are breaking your lease. Check your state rules to find out the legal amount of time required for the notice before you file for eviction, and if your state requires multiple infractions before pursuing eviction.
Serving notice (unofficially) can be as simple as taping a piece of paper to their door saying “pay past-due rent, or I’m evicting you “. However, it’s not really official until you mail them a formal letter and send it via Certified Mail as evidence of receipt. In a perfect world, the letter taped to the door will be enough to scare them into finding the money somewhere (i.e. mom and dad).
6. Make the Consequences Known
You have to be prepared to report a past-due tenant to the credit agency. More importantly, make sure your tenants know that you will report them – which will ruin their credit.
You must include a statement in your lease agreement, informing your tenants that late rent payments may be reported to the three major credit agencies. You must also disclose that late payments may negatively affect their credit. This alone will likely keep the tenant on their toes and ensure you receive rent on time.
Obviously, you don’t “want” to report anyone, and this is more of a scare-tactic than anything else. Nonetheless, you should know how to follow-through. To report a late rent payment, or a delinquent tenant, you’ll need to call the credit bureaus for guidance:
Note: In some cases, there may be a fee to report a tenant. In other cases, you may have to get a judgment, or submit the debt to a collections agency before it will show up on the tenant’s credit report.
7. Offer Rewards to Responsible Tenants
A critical part of managing a rental property is holding on to good tenants. Sometimes landlords can be so focused on preventing unwanted situations that they overlook the renters who make their job worthwhile.
If you have a tenant that always pays rent on time, abides by your rules and takes good care of your property, show them how much you appreciate them with an Amazon gift card or fruit basket.
A perfect opportunity to show your appreciation is after your tenants have paid a year of consecutive, timely rent payments. A well-timed gift basket could also provide a wavering tenant with the motivation needed to renew their lease.