Chronic Late Rent with Property Manager in Place

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Chronic Late Rent with Property Manager in Place

David D'Ambrosio
Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes

I have a dilemma I would like to pose to the crowd.  I have a sf rental in Florida with professional management in place that charges 8% per month.  I have four homes with them.  Three have been steady without any real problems.  The fourth pays the rent late every single month.  At least three weeks.  They have never gone into the next month, but have never paid on time.  the late fees are 100 per month, which they have also paid and I split 50:50 with the PM.  The lease is up in March.  It cash flows about $400 per month.  My dilemma is that if I don't allow them to stay when their lease is up, I not only stand to lose for vacancy but the PM also charges a one month lease up fee.  The rent is $900 per month, the mortgage and insurance is $400 per month.  Should I get rid of these tenants and lose months worth of income or let it go since they have never gotten to the eviction point?

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Carlos RoviraBusiness Member
Investor · Miami, FL · Member since 2015 · 329 posts · 124 votes
9y
It seems like you have two separate issues. #1 - the property manager is not doing a good enough job of collecting. They probably shouldn't be getting 50% of the late fee. It incentivizes them to not ensure the tenants pay on time since they generate more revenue from late tenants. #2 - the tenant who pays late: If the tenant always pays even though it's late, I'd just bite your lip until the lease is up and then not renew. It will be cheaper than trying to evict.
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  • Carlos RoviraBusiness Member
    Investor · Miami, FL · Member since 2015 · 329 posts · 124 votes
    9y
    It seems like you have two separate issues. #1 - the property manager is not doing a good enough job of collecting. They probably shouldn't be getting 50% of the late fee. It incentivizes them to not ensure the tenants pay on time since they generate more revenue from late tenants. #2 - the tenant who pays late: If the tenant always pays even though it's late, I'd just bite your lip until the lease is up and then not renew. It will be cheaper than trying to evict.
    3Reply
  • David D'Ambrosio
    OP
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    9y

    Thanks for then response @Carlos Rovira.  So you would just eat the loss for the potential vacancy and re-lease fee?  FYI, this company collects 100% of the late fees and I have found that is the policy of most PMs, i actually negotiated the 50% with them with my argument being exactly what you said, that it incentivizes them to collect late.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    "The rent is $900 per month, the mortgage and insurance is $400 per month."

    First you are not making $400/month cash flow, long term you will be negative on this SFH

    As for your tenant issue, I do not understand your dilemma. Is there all of a sudden a reason you need them to start paying on time.  Do you really care if they pay late ? If not do nothing as these tenants have been trained and it appears your PM is OK with him and you making extra money. 

    If their late payment is causing problems instruct your PM to correct their behaviour. Following your instructions is your PMs job. This will require quick serving of pay or quit possibly followed by a eviction notice but till the PM begins the process you will not know where it ends.

    There is no reason to assume you will be facing a eviction or vacancy. Those are not logical assumptions at this point and not factors at this time to base your business decisions on. You are only considering a direction/process not making cut and dry final decisions.

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  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    I think both yourself and the PM comlanynhave allowed this to go, therefore setting a precedent that is ok to pay late, no matter who receives the late fees. Has the PM company ever served them with 3 day notices, and then let them pay whenever? Did they explain this to you, and you both deceided to whether to accept their rent check?

    I would give them a non renewal at the end of their lease term. Be done and move on

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  • Todd Plambeck
    Agent/Investor · Murphy, TX · Member since 2013 · 542 posts · 304 votes
    9y

    Here's the obvious question, why are they paying late every month?  Chances are they get paid on the 1st and the 15th.  All of their other bills come out of the 1st paycheck and you get paid out of the 15th check.  This is not uncommon for paycheck to paycheck renters.  Why not ask them why they are always late and change the due date for the rent when the lease comes up for renewal.  That saves them $100 a month, gives you piece of mind and will create a better tenant for you in the long run.

    2Reply
  • David D'Ambrosio
    OP
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    9y

    @Thomas S.  I was giving some rough numbers just to give you an idea of what they are.  Thats why I said cash flows about 400/month  I would love to see your rationale for why I will be negative without knowing anything else about this investment.  You don't know the location or the cost of the house or any other expenses.   Im asking for advice, thats what this website is for.  I am relatively new at this, thats why I'm asking for advice.  My "dilemma" is wondering if other investors feel that this late payment issue is really an issue at all.  Technically it is to my advantage for them to pay late as I make extra money.  Im assuming that you would agree with this.

    Maybe my post wasn't getting my question across clearly, or maybe you need to go back and read it again.  My basic question is should i tolerate late payments from a tenant that always pays, but pays late, or should I let them go when their lease is up and bring in a new tenant with all the expenses associated with it.  This seems a pretty logical thought process to me.  

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  • David D'Ambrosio
    OP
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    9y

    @Kim Meredith Hampton.  thanks for the response and your opinion about it.  They are served with pay or quits every month after 5 days being late. They always make the cutoff before eviction is started.

    @Todd Plambeck  Wow. i hadn't thought of that.  I get paid once a month.  Great point.  I will discuss this with the PM.  great insight, i appreciate it. 

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  • Robert Melcher
    Residential Real Estate Broker · San Antonio, TX · Member since 2016 · 506 posts · 311 votes
    9y

    The PM should be giving notice as soon as it is allowed by law and filing for eviction as soon after that as possible.  Our lease makes the resident responsible for these charges, which are paid first out of any funds received.

    The cost gets much higher, and the tenant either gets trained or leaves.

    We do EVERY tenant the same way, or we could be liable for fair housing or discrimination claims. 

    If your PM is treating this one different than the rest, he's putting you at risk.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    "They are served with pay or quits every month after 5 days being late."

    With that clarification I would without a doubt terminate at the end of their lease. I never tolerate any repeat late payments but assumed your PM had not been dealing with it in the past since your post made no mention. With that in mind your PM should be advertising for a new tenant prior to the end of their lease and have a replacement tenant ready which will avoid a vacancy. Planed terminations should never cause a vacancy.

    Some landlords could care less about late payments as they do not depend on the income to cover bills but in this case when a PM gives notice for a late an repeat late payment should have resulted in a eviction. I assume you never instructed your PM of this policy. Your PM is profiting from the late payments and will do everything he can to insure it continues and may have even told your tenant as much.

    As for your income since you have stated no other "expenses" in your rough numbers if they are at all close to actual your long term expenses on a SFH will generally be in the 50% range ( in know that is not the case now) give or take which will leave you in negative territory on a long term hold. You also do not mention having equity in the property, if you do the opportunity value of cash will also negatively impact cash flow.

    On the surface, based only on the fact that it is a SFH, with very little info what you have provided indicates negative cash flow long term. It's simply income property math that is generally quite accurate.

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  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    9y

    IMHO the late fees are not large enough AND the PM is taking too large of a percentage for doing 'the work' (that they are not doing).  I would probably keep the tenants, change the contract AND increase the deposit to the state maximum allowed by law.  

    As one of the posters above stated, serve them with a pay or quit after 5 days where the TENANT is charged for the 'privilidge' of being served.  Change the late fees to per day, if your state allows.  I would make them hurt for screwing you for the last year.

    You are PROBABLY having to pay the PM for them to post a pay or quit notice.  Maybe $50.  I would make THAT FEE chargeable to the tenant (if allowed by law).  If you want to get really creative, charge $100 for the $50 pay or quit fee you have to pay.  The idea of a late fee is for it to be as punishing as possible.  

    My rents are due on the 1st and late on the 3rd.  I don't even wait until the 5th for it to be late.  My tenants have a late fee and then a daily late fee.  I've had ONE late on 9 properties in the last 3 years.  And I was told about that one PRIOR to the first of the month where we negotiated the situation.

    Real Estate is about systems and what you need to have it work for you.  Otherwise it becomes a headache and nightmare.

    If you create the scenario you want, the tenants will either straighten up or leave.  I get having to pay a months rent to the PM to get a new tenant.  But I would tell the PM that if this situation is NOT changed to your satisfaction, they are fired on ALL 4 properties. 

    You need to give EVERYONE an incentive to 'fly right'.  

    AG

    1Reply
  • Michael Gansberg
    Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
    9y

    @David D'Ambrosio, 

    I respectfully disagree- mostly- with the responses thus far. Dude, you're getting free money. Imagine I told you that I owe you $900 each month, but for a 3 week delay in payment, I'll give you $950. That's a 5.6% return in a three week period, or 97% ANNUALIZED!! You can't get those returns anywhere, not even in a Ponzi scheme before it collapses. 

    I think @Carlos Rovira is right, your manager is being a hog, most of the late fee should go to you. I don't think it's worth causing substantial static over it- maybe suggest a more equitable 70/30 split if your manager has to make two trips to collect the rent from this tenant. If your PM isn't expending extra effort collecting, the PM should just get 8% of the late fee.

    Keep these tenants. If they ever go into the next month, that's a red flag worthy of initiating eviction proceedings, but if they're constantly 3 weeks behind and are paying you over $1k per year in late fees, I'd send them flowers and champagne.

    2Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    9y

    I am surprised to hear that the PM gets part of the late fee, but I can accept that reality. Here's my question:

    Is it really that bad to get the rent a bit late each month? You're essentially getting an extra 5.5% on your rent for a short-term $900 loan. For the sake of argument, let's say that it takes them two weeks past the due date to pay each time; that puts your annualized return at a whopping 303%! We should all be so lucky to have our tenants pay late each month.

    Disclaimer: I had to do the math on my phone calculator, so someone please double-check my math. For reference, here's my equation (I could be off on this too. It's been a while since I tried to manually calculate it): 1.055^(365/14)-1. And yes, on a leap year your return is slightly lower. 

    1Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    9y

    Ah, I see @Michael Gansberg posted the same thing I did, but right before I did. One of us is off on the math though; for three weeks I got a return of 153%. Can someone verify the numbers for us? 

    Either way, the point stands.

    0Reply
  • Michael Gansberg
    Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
    9y

    @Jacob Pereira, glad we agree on this. I calculated the annualized return using the equation for simple interest(multiplied 5.6% by 52/3,) your calculation considered the interest to be compounded. I'd go with simple interest on this one- it would be compounded if the $50 stayed in the same account, and the 5.6% interest accrued on the new amount in the subsequent period(so for instance, the tenant would have to pay the late fee of 5.6% on $950 in the following month, then the late fee of 5.6% on (1.056)($950) in the month after that, and so on...)

    Either way- compound or simple- the return is too good to ignore.

    2Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    9y

    @Michael Gansberg, you're right on this one. I'll leave my shame up there as a future warning of what my hubris has caused. 

    Now how can we get all our tenants to start paying late...

    1Reply
  • David D'Ambrosio
    OP
    Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
    9y

    yeah that's kind of how I feel about it the late fee is extra money.  The reason I pose the question is I constantly read and hear podcasts saying it's unacceptable to allow chronic late payments.    I guess since they have always paid before the end of the month that I should keep collecting and evict them if it gets worse

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    @Michael Gansberg

    Why not just set the tenants rent at $950 or even $1000 and tell him he can pay when ever he pleases as long as at the end of the year he has paid a total of 12 X $950 ($1000).

    Either way is a good business plan as long as you make more money right. Make sure you remove all the lease clauses you do not intend to inforce just to simplify things.

    Seriously are you guys actually operating a business.

    0Reply
  • Michael Gansberg
    Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
    9y

    @Thomas S.'s tenant is doing? That's money in the bank, baby. If David raised the rental rate to $950, his residents would probably rent somewhere else- they are making a dumb financial move in paying late, but that shouldn't prevent the OP from profiting handsomely as he is doing.

    0Reply
  • Chuy Gonzalez
    Investor · Long Beach, CA · Member since 2012 · 313 posts · 190 votes
    9y

    Get rid of the tennant and the lame PM company.

    1Reply
  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    9y

    @Thomas S. (and by extension, my) comments. Why would you posture that taking the late fee is not a good business decision? If for some reason it wasn't, why not raise the punitive amount to the point where it is? Within the bounds of your state/city/county's laws, of course.

    There are many subjective elements to real estate investing, but this is an example of a cut and dry win for the landlord. Being rigid doesn't help anyone, and the person who is most negatively impacted by it is the landlord. The alternative to taking the late fee is eviction, and taking all the extra legal fees, make-ready costs, vacancy times, and marketing costs with it (the OP mentioned one month's rent, but there are actually significantly higher costs than that to a changeout).

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    It is pure stupidity on the part of a business to impose late fees as a punishment or for the purpose of persuading customers to pay on time and then view the payment as a bonus income. Paying late is a sign of disrespect that should never be tolerated by any self respecting landlord.

    When a tenant repeatedly pays a late fee they are saying to their landlord "screw you here is some chump change for your piggy bank now back off A hole.

    There is absolutely no reason to have any rule that is not intended to be enforced. Rules are rules not guidelines designed to confuse people. The alternative to late fees is to teach customers of any business to pay on time and to cover the costs incurred by the business in chasing payments.

    If you feel you are benefiting by having tenants in control of your business that is your choice. I prefer to make my rules and be in control of my business rather than turn that responsibility over to my tenants.

    0Reply
  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Thomas S. you constantly talk about running a business and being all about the numbers but now you are saying screw the numbers, get rid of them because they are being disrespectful. Which is it going to be? The numbers are good, so their business is profiting more for no additional work. Should they evict/not renew because of their pride/emotions? That goes against most of your other posts...

    Personally, I would not renew them and look into alternate management. The agreement is the agreement and the OP has allowed the tenant/PM to do whatever they want even if it does make extra money. Have a walk-through done to assess the condition and be prepared for a turnover.

    0Reply
  • Jason McKinney
    Mount Pleasant, SC · Member since 2016 · 13 posts · 5 votes
    9y
    Banks love clients like this that chronically pay late fees and service fees why shouldn't we? Greg S doesn't like the math on this rental but it's way better than most folks can manage in my market.
    0Reply
  • Joseph Daugert
    creve coeur, MO · Member since 2012 · 3 posts · 0 votes
    9y

    Not knowledgeable at all as I haven't even begun but it seems to me that extra money is good. Disrespect? Disrespect would be not paying the late fee. Rules? Breaking the rules would be not paying the late fee. If a renters attitude is "Screw you, here's an extra $100.00" Well let them have an attitude! Too late to try and re-negotiate with the property management company but I would say that the contract should have gave them the same percentage of the late fee as the rent. in this case 8%.

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  • Robert GilstrapPro Member
    Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
    9y

    Once again I'm glad many of the responders aren't managing any of my property...So you are getting an extra $50/mo in income each month and that's a problem how?

    I also love how people are quick to point out the PM is "not doing their job."  I'm just curious but for all the experts out there exactly how do you force someone to pay on time? I've only been doing this 24 years and I must be missing something. From your comments the PM is doing their job exactly; they are filing notices each month, they are collecting the agreed upon fees and you are making an extra $50. I assume the filing costs are 100% reimbursed by the tenant when they pay late each month. If they aren't then you have a problem but I assume they are.

    Why in the world would you get rid of people who are voluntarily paying you more money than you asked for each month?  The process should be that you file each month and if they pay the rent and all fees before court then great, if not then you evict and move on.

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