Rent Payment Plans Can Benefit Both Tenant & Landlord: Here’s Why
Our rental agreements are set up as follows:
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- Rent is due on the 1st of the month.
- Rent is considered late after the 5th of the month, at which point late fees begin to kick in. We have a late fee that kicks in on the 6th and then a daily late fee that continues to add on until the tenant submits his rent. Be sure to follow your state laws on the maximum late fees that you can charge.
- We can begin the eviction on the 16th of the month. In my state of South Carolina, a notice does not need to be sent for unpaid rent so long as specific language is included in the rental agreement.
Theoretically, we should always begin the eviction on the 16th of the month if rent hasn’t been paid by then. I always recommend that landlords start the eviction as soon as they can, but in practice, I don’t always take my own advice.
Why the Hypocrisy?
Following your rental agreement nearly exactly is what most successful real estate investors will tell you to do, especially the ones who write books. But I've always felt that this statement was too general and that reality requires the landlord to assess each situation on a case-by-case basis.
For those who don’t know, I invest in mobile homes. Nearly all of our tenants live on a paycheck-to-paycheck basis, which means that whenever life throws an unexpected expense that’s greater than a couple hundred dollars, they’re going to struggle to pay all of their bills on time.
I’m used to getting phone calls, text messages, or emails from a tenant who says he won’t be paying the rent on time this month due to [fill in your own excuse here.]
Reasons to Work With a Tenant
Obviously, tenants can pay late up to the 16th with no issue (so long as late fees are included), but when they’re going to need more time than the 16th to pay the full amount of rent, here is what we typically need to see:
- Communication. If the tenant is not returning my phone calls and emails, then I’m sending the eviction on the 16th. But if they’re keeping me informed of what’s going on, I’m more willing to work with them.
- Payment Schedule. As soon as the tenant lets us know that they’re going to need more time, we try to immediately set up a plan to pay the rent. I’ll also typically shorten the late fees so long as all payments are made according to the new schedule. Most of our schedules tend to range over just a couple of weeks.
- Following Through. Does the tenant actually submit a payment according to the payment schedule? If they don’t make the first payment, we’re typically starting the eviction process that next day. If they’ve made one payment that month but missed the second, then the eviction process cannot be started with the acceptance of a partial payment until the rent for next month becomes late. Also, if any payment is missed, the late fees return to their higher original values.
- History. In the past, has the tenant communicated well when problems arose and do they stick to the payment schedule? How often have we needed to do payment plans? I’m much less willing to do payment plans with someone who didn’t communicate in the past or didn’t follow a previous payment plan.
The Benefits of a Payment Plan
I know that it sounds like a nightmare dealing with these headaches, but let me give a couple of reasons as to why payment plans can be beneficial to not only the tenant but also the landlord:
- More Income. This is obvious, as an eviction is going to result in losing income for an entire month versus a payment plan, where eventually you hope to collect the full amount of rent for a given month. The main reason that we don’t mind people paying late is being able to collect additional revenue in the form of late fees. We charge high late fees, which has allowed us to collect several thousands of dollars in late fees this year.
- Lower Vacancy. With giving your tenant an additional couple of weeks to pay the rent, the idea is that they will be able to catch up, and you won’t have to spend the time and money on evicting the current tenant, getting the home ready for the next tenant, and finding the next tenant.
It does take time to deal with these payment plans, but not as much as you might think. I still spend way more of my time finding more properties to buy and the money to purchase those properties than I do managing tenants.
Here are some tools I use to keep track of the payment plans:
- Record Keeping. This is essential! You have to have a central area to keep notes of who’s supposed to pay what and on what day. I prefer using an email draft in Gmail that I constantly add and delete from, no matter what device I’m on. If you have more than one person in your business who manages tenants, you may want to look at using a spreadsheet that’s shared in the cloud.
- Online Payment System. There are several third-party websites that a landlord can use to accept rent from. If you read through the BiggerPockets Forums, you’ll find several discussed. I prefer using eRentPayment because of its ability to block partial payments, and it automatically calculates late fees, which is useful if you have a daily late fee.
Have you had success with payment plans in the past?
Let me know your experiences with tenants not being able to pay rent in the comments section!