Most outsiders don’t understand just how much stress comes with being a landlord. They assume it’s a flexible job where you ride around town, check in on properties, fix a doorknob or two, and chat with tenants. But what they don’t realize is that it’s actually a struggle to keep the entire operation afloat. Chief among these challenges is consistently collecting rent payments on time.
As a landlord, few things matter more than cash flow. Without proper cash flow, you risk missing your own payments and/or generating a negative return on your investment. And while there are dozens of factors that affect your rental property cash flow, rent payments are perhaps the most serious element. If rent payments are late, or don’t come through at all, you will quickly find yourself in a compromising position.
You can have nine tenants that consistently pay their rent on time, but all it takes is one tenant to throw your cash flow and accounting statements out of line. The good news is that there are ways to reduce the frequency of late payments. The key is to develop a plan and implement it from the start.
Here are a few helpful tips and tricks:
Believe it or not, good rent collection starts with stellar tenant screening. If you can get the right tenants in your properties, you don’t have to worry about all of the issues that usually come into play when there’s an irresponsible tenant.
As part of your tenant screening process, make sure you’re speaking with past landlords about the tenant’s payment habits. They should tip you off to any red flags. It’s also smart to look at credit reports and speak with past and present employers to get a feel for how steady their income is.
Tenants need to know that there will be long-term consequences for their actions. If they pay on time, it will reflect positively on them. If they consistently make late payments, they’ll be branded with a scarlet letter.
One suggestion is to notify tenants that you’ll be reporting all payments to the three credit bureaus through a service like the TVS database. (As long as you let tenants know in advance, this is totally legal.) This will brand them as either a “low risk” or “high risk” tenant, which will positively or negatively impact their ability to secure future housing.
(As a note, you can also use a service like the TVS database during your tenant screening process to increase your chances of finding reliable tenants who have a history of paying on time.)
The more you can streamline rent collection, the less likely it is that you’ll encounter a tenant who consistently misses payments. One of the best strategies is to require tenants to pay rent via “auto-pay.”
Auto-pay can be set up in a number of ways. The most common option is to set up an ACH transaction that automatically deducts the rent payment on the same day each month. The only downside is that the tenant actually has to have money in the account for you to get paid (so there’s nothing protecting you from a bounced check).
Tenants who miss rent payments aren’t necessarily careless. In other words, it’s not like they just forget to make the payment every month. It’s much more likely that they have financial troubles and don’t have enough money to pay all of their bills. As a result, they tend to pay bills in cycles, which means you consistently get their rent payment late.
One way to move your bill to the top of the pile – so that you get paid before their paycheck goes to all of the other bills – is to reward early payments with a discount, refund, or credit towards the next month’s rent.
Encouraging early payments with rewards works for some people. Other tenants only respond when there are negative repercussions involved. By introducing late fees into the equation, you can encourage these tenants to stop making delinquent rent payments.
Late fees, in conjunction with a promise to report late payments to the three credit bureaus, will be enough to get most tenants to pay on time. The key is to actually enforce these late fees. Saying you’re going to tack on an extra charge and then failing to follow up will actually hurt you more than if there was never a late fee to begin with.
Habitual late payers don’t get to where they are without being really good at making excuses. While the human side of you wants to be compassionate and work with someone who is in a bad situation, the business side of you has to ignore the inevitable sob stories you’ll get.
In most cases, sob stories come from the same tenants over and over again. One month, it’s a lost job. The next month, it’s a sick parent. The month after that, it’s an emergency car repair. While it’s possible that one of these issues may be genuine, you have to remember that you’re running a business – not a charitable organization.
You can only do so much. If a tenant continually refuses to pay rent, you can eventually pursue eviction as a legal consequence. While this is a long, complicated process, it could be the only way to save your property.
With more than 30 years in the industry, Green Residential is Houston’s most experienced and trustworthy property management company. We provide proactive, customizable property management services that focus on providing superior service and enduring value to real estate investors, landlords, and their tenants. From property marketing and tenant screening to rent collection and evictions, we handle it all.
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