What do you think of offering a discount for paying rent early?

17 Replies

I met a landlord who offers tenants a discount for paying rent early instead of adding fees for paying late. It seems to work for him. What are your thoughts? 

I love it but I don't.

I have always been on the reward side of the reward/punishment argument so this makes sense to me.

But...

Not when it comes to my money. I believe in the concept that a reward is more of an incentive to do something than a consequence is for not doing something, but I also believe fees build MASSIVE businesses. I would rather let a tenant be late and collect full amount plus late fees than discount the total rent. The time value of money is not so high that an extra week will be more expensive than the late fees and added rent I would be likely to collect. 

So in summation, I'm sure it works and this landlord gets his rent early/on time much more often than the average, but I don't know that I would want to sacrifice the extra earning potential just to insure timely rent payments. 

Just my 2 cents.

Adam 

Hi Chris,

We sometimes use both if a property sits too long. 

Market your 'asking' rent price... "pay on or before the 1st of each month and receive a $XX.XX discount from the 'asking' rent price." 

If they pay after the first, but during the grace period then they only pay the 'asking' price. However, if they pay beyond the grace period - they pay the 'asking' price plus a late fee.

Our clients really like this approach.

Best of luck!

Leland

We have one buy and hold property that was purchased as a turnkey with minor upgrades. The previous owner had been using a discount for paying before the first and we continued the practice. The discount is $50 if rent is paid anytime before 5:00pm on the last day of the month.  The full rent is due on first day and there will be late charges if not paid on time or after grace period.  The discounted price is still good tent for the property so I do not feel we are losing, the tenants like the discount and utilize it.  This is just one tool and we like it. 

As others have said on other BP threads, our mortgages are not discounted for early payment. Neither are other bills. There are fees for being late though. I had a tenant pay a few days late last month and that was an extra $50. I'm with @Adam Hershman on this one.

It also reinforces that being late has consequences; otherwise, a few days could easily turn into a few weeks, and then you have a real problem to deal with.

I rarely have a month where I don't get late fees. I put all of my late fees into my "liquid fund". The funds are used to purchase scotch. My tenants have paid for some very nice bottles. I like late fees.

Originally posted by Aly NA on this one.

It also reinforces that being late has consequences; otherwise, a few days could easily turn into a few weeks, and then you have a real problem to deal with.

 Aly,

Mathematically speaking, the notes against our mortgages are discounted by early, and frequent, payment ;-)  On our smaller residential properties we have 5-yr term, variable rate mortgages (prime - 0.45).  All mortgages were originally subscribed with a 25yr amortization on the corresponding note.  Through the simple choice of making bi-weekly payments, as opposed to the default of monthly, we have cut 5-7 years off each amortization and reduced the amount of interest paid by thousands of dollars.

Getting back on topic, we have used the carrot approach to convince tenants to move from cash to electronic payment (pay electronically and you save 5%), but have found the stick to be more effective in dissuading late rents.

@Chris L.  I think I need to object to the idea on philosophical grounds.

When you extract a late fee it's because the tenant has caused you legal injury because if their failure to pay on time. If you "discount the rent" for paying early, respectfully, it feels like you've transitioned from landlady to land-nanny.

Vacancy is a bigger threat to your bottom line than mild tardiness with respect to payment. I know some landlords that take a lesson from cell phone shops: they use inexpensive loss leaders to secure longer term contracts.

How this usually works:

Someone signs up for a lease with a term of 14 (or 18) months instead of the more typical 12 months. In exchange they're given a loss leader such as a 50" TV or an iPad for "free." The value is agreed upon contractually in a lease addendum and is usually more than the landlord paid e.g., a $250 TV with a contractually agreed upon "value" of $600. If the tenant breaks the lease the value in the addendum is added to any future collection attempt.

If done correctly, in the right area, this can decrease the amount of turnover and increase the speed with which you take on new tenants in the event of a vacancy. What do you think?

Months in advance? Yes.

Days in advance? Nope it creates a reward for just paying days before a due date to be on time rather than Prepayment.

Hi @Roy N. - no carrot or stick in regards to how they pay rent. It's electronic if that's how I want it; for example, when one tenant has the same amount of rent as another and I don't know who paid on time or who didn't, one (or both) have to pay electronically by auto-debit through erentpayment.com. It's set up when they sign the lease. The rent is not discounted.

For some tenants, they can pay by depositing directly into my business account at the bank. Rent amount is the same regardless.

But it's an interesting point. In Florida, if you pay your property taxes 6 months before they're due, you get a discount. The discount gets smaller as the final due date approaches.

Originally posted by @Jeff Rabinowitz :

I rarely have a month where I don't get late fees. I put all of my late fees into my "liquid fund". The funds are used to purchase scotch. My tenants have paid for some very nice bottles. I like late fees.

 You are my hero.

I would do it addition to late fees.  Other-wise the rent schedule could get really wacky.  If the early deadline is the 25th and the grace period ends on the 4th, they could end up paying 40 days apart and then only have 20 days to get the rent together for the next month.

One advantage of the discount is it is more likely to be awarded(full rent) where late fees may not be included in a judgement.

The judges in the cities where I have rentals have always upheld the late fees. They are clearly specified in the lease.

First off, check your market and make sure that is legal!

Second off, that can be really hard with areas with ceilings. My area you market a place $25 above the "ceiling" and no one will look at your place. So giving the discount doesn't do anything but cut into your margins!

Third off, train them right and they will pay on time. Plus a 10% late fee downs't hurt (again check your area!)

Thanks everyone for your input! A few thoughts I had were that the approach may very depending on the type and income level of the tenants. My reasons for considering it (besides being a potential way to get rent on time) were:

-It could build good juju between the landlord & tenant if the tenant is getting their discount each month

-If they break the lease early, you can go after them for the full rent of the remaining months, not the discounted rent (or this a problem that happens more often in NYC?)

-How it makes you look in court if you do end up having to take them to court. Maybe it would be harder for them to paint you as an evil landlord.

On a side note, @Roy N. I like your bi-weekly approach. I know a landlord who does that with his mobile home park tenants and gives them 2 weeks rent-free (one payment off) at Christmas if they were good tenants. They appreciate the "gift".

@Chris L.  

My example above was about making bi-weekly mortgage payments.

However, we once had a tenant who paid her rent bi-weekly (in-advance) ... so by the end of the month, she had deposited the next month's rent.   She asked for this arrangement as it fit her pay schedule and she did not trust herself (or maybe her somewhat of a bum partner) to hand onto the rent money until the end of the month.

I wrote about this awhile back on another thread, but in my prior apartment complex when the manager that moved me in was there (he got promoted about 6 months of me living there); he used to have an incentive that if you paid your rent early, you'd be entered into a drawing to win $25. 

In the grander scheme of things, he managed two buildings that were 8 stories, and had at least a few hundred tenants, so him offering $25 to ONE tenant a month was not a lot of money. AND, for him, he was able to get people to pay their rent before the 1st, so that money would be in their property management company business account accruing (minimal interest), versus in the tenants account.

I do not do that. I do however charge a late fee if they pay late. I do not get a reward for paying my charge card bills early. Who ever heard of such a thing. They are responsible adults aren't they?

They should pay their bills on time like the rest of us. I charge my tenants a $50 late fee after the 5th, and recently I went to $5 a day late fee after the 5th.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.