Incentives to Encourage Tenants to Pay On Time?
Investor · Buda, TX · Member since 2016 · 137 posts · 55 votes
I have that typical one property (fourplex) that gives me a monthly headache when it comes time to collect. I'll receive all kinds of stories on why they don't have the full rent, can I pay you rest in two weeks, etc.. I'm new to being a landlord to a C+/B- property so definitely learning as I go.
I've just been dealing with it and taking late fees but I'm curious to hear of any stories from others on what they've done besides the basic ideas to get tenants to pay on time. I've thought of having some sort of 6 month challenge where a reward would be given if no payments are missed but that may become a pain to deal with and I have a hard time justifying why I have to lose money in order to collect the agreed to rent.
Here's an incentive. If they pay the rent on the first they wont get served with eviction papers. Unfortunately you need to pay off your bills on their due date. I am pretty sure your bank wont give you a discount just because you honor your commitment. If you start giving pay or quit notices they will realize that they need to keep you at the top of their priority list instead of you nnow telling them its ok to do other things with their money instead of pay rent.
I have that typical one property (fourplex) that gives me a monthly headache when it comes time to collect. I'll receive all kinds of stories on why they don't have the full rent, can I pay you rest in two weeks, etc.. I'm new to being a landlord to a C+/B- property so definitely learning as I go.
I've just been dealing with it and taking late fees but I'm curious to hear of any stories from others on what they've done besides the basic ideas to get tenants to pay on time. I've thought of having some sort of 6 month challenge where a reward would be given if no payments are missed but that may become a pain to deal with and I have a hard time justifying why I have to lose money in order to collect the agreed to rent.
You will always have stories, that is just tenants making white noise.
First get your late fees up to to the maximum level the law will allow, normally around 10%. You then need to follow a business process of when it's due, late, and when you start sending notices, and court orders.
We like our rents on the 1st, it's late after the 2nd with a $130 late fee that we don't apply till the 5th because we are nice people. We send standard notice to pay or quit on the 5th, we then send them a certified notice of pay or quit on the 10th and charge them $35 for that one, then on the 15th we file a court summons, and charge them for the court filing cost and $35 processing for that as well.
That process cleans up even the worst of portfolios. We picked up a 22 units at the start of this year. Tenants where all over the place with paying rents, old landlord said the tenants where the worst, some had not paid him for months, heck I think some where not paying at all, even paying rents at 50% below market. We laid down the law, kicked 4 people to the curb within 60 days, and the rest started magically paying on time. Tenants talk, if they know they can give you stories and not pay rent, they will give you stories. In the business world, it's called cashflow management, and tenants are great at it.
Thanks for laying out the schedule, I'll check what our requirements are for notice, filing etc and make sure I keep up with it. I'm sure setting an example with the first one to really push it will help with the others paying on time.
@Eric Barnett - this won't help you with your existing tenants, but we do the following regularly when signing a new lease with applicants with spotty credit or payment history to encourage timely payment of rent:
This has been very well received by tenants and I have noticed a few of them get in the habit of paying early while trying to earn back the extra deposit, and this behavior tends to continue after the extra deposit has been refunded.
Andy
@Andy Webb - that's interesting but not sure how well it would work with this level of tenants...what type of properties have you been successful implementing this on?
@Eric Barnett so a few ideas not previously discussed.
1) Can your tenants afford rent or is it just they can't be bothered to pay rent? Can't afford it, then time for new tenants obviously. If they can't be bothered, then can they be trained to care? if not then time for new tenants. If so, read on.
2) Read your lease and enforce the terms of the lease regardless of previous practice. If you don't want to follow the old lease and the tenants don't want to follow it either then prepare another lease with terms you both agree to and have all parties sign it. Make sure you void the previous lease.
3) It sounds like you are dropping by and picking up rent. Stop that immediately, collecting cash personally is seriously dangerous. At a minimum, get a bank account at the nearest bank to the property and direct tenants to make their deposits there. You can search old posts on this topic and find the ins and outs of doing this and protecting your money. If you have specific questions post back and someone will answer.
4) If the tenants have bank accounts (C+/B- tenants have bank accounts), then set up an ACH debiting service to take the rent from their bank account. Very easy and very cheap in the grand scheme of things. If you tenants don't have bank accounts then you need to tread water until their lease is up and get some better tenants.
5) Sounds like your tenants can't or won't manage their money. Set them up on a weekly or bi-weekly payment plan (remember do this all in writing signed by all parties). Tenant gets paid every two weeks, rent is due every two weeks. Forget about collecting once a month.
6) The key is automation. First priority is to get rent without any repeated action required by you (no going to the mail box and wondering if rent is there or worse going by the property to pickup rent and wondering if the tenant will be there to pay). 2nd priority is to get rent without any repeated action required by tenant (money leaves the tenant's bank account automatically each month - no trips to the bank, no dropping the check in the mail, no remembering to log on and click send).
@Eric Barnett Check out Mike Butler's book Landlording on auto pilot. I think he has a really good system. It might help you out quite a bit.
An incentive may be a credit towards a down payment for purchasing a house, if that's what you are renting. I like the comments of Joshua R from Chicago concerning automated payment.
Tom
It never ceases to amaze me on the number of posts on BP dedicated to late rent.
Many investors just follow a simple schedule that complies with the law and the general practice in their markets....for example...in certain markets, rent due on the 1st, late on the 6th, eviction filed on the 10th. Follows the lease, includes late fee if applicable, respectful to the resident, respectful to the owner, no stories, no conversations, no mind share dedicated to it.
Hold one of their relatives at an undisclosed location and return them when rent is paid.
Please use with caution as the legality of this varies from location to location.
I love late payments. I have a tenant who pays late all the time and know he has to cover the fee. Those are my most profitable months. Please do not confuse this with eviction or non payment. That is another issue all together. As long as they don't go over 30 days and pay the fee, we are cool. I have enough cash on hand to run my properties, so if I wait another 5 days and clear $50, that is fine by me.
If I had any you would be welcome to them, but I have never had a tenant pay late three times. Your description of what appears to be a great tenant would never consistently pay late.
I target retirees and seniors. I have some older working tenants, youngest being about 50 yrs old, so my tenant quality is extremely high. I know who to target and how to screen. I have a 10% normal yearly turn over and most of my tenants are very, very long term
The few bad ones that have slipped through have either made a complete life change and are now good tenants or they voluntarily decide to leave.
My time is too valuable to waste on bad tenants playing head games. Good tenants out number them 9 to 1.
@Thomas S. If the tenant base is that good why the need for quarterly inspections then? Just to keep them on their toes? If it works for you, great, keep at it.
@Mike Dymski Fantastic description. Simply follow a rational process. No crazy phone calls, chest pounding, or sleepless nights trying to figure out what to do next. Just stick to your plan and it's on auto-pilot. I only get concerned when I see "plans" that are so involved or strict that they are actually counterproductive to what one is really trying to accomplish: a healthy bottom line efficient use of time.
I do inspections for my benefit not to keep tenants on their toes. Damage happens, things break, screws get lose, leaks occur, mold forms, batteries die, filters need replacing. The list goes on and on. The inspections take 1/2 hr then another hour shooting the breeze and having a coffee.
Like I said all my tenants are good tenants. I ones that cause problems don't stay.
@Eric Barnett - are they paying every month? I own a few mobile home parks and the tenants are similar. Some constantly have a story. However, if they pay late fees every month, then I actually make more money. I'm not concerned. If they miss a month, that's a problem and I would kick them out. Then screen hard on the way in by calling previous landlords to verify their payment history and current employers to verify how much they make. This isn't foolproof, but it helps to get some understanding of how they acted in the past and if they can afford rent.
@Eric Barnett - we have all single-family houses, most I would call low-to-mid-B class. Rents range from $1100 to $1600 and we have applied that concept at both ends of that range.
I am curious, if rent is due on the 1st and late on the 2nd why do you stall the system for 5 days before sending the pay or quit. Legally, and for your own protection, you should be issuing the pay or quit on the 2nd, long before the late fee is in effect.
The time from the 1st to the 5th is not a rent free grace period it is a late fee grace period. This is something that way too many landlords do not understand. Your tenants are using you as a bank to borrow your money without your consent. It needs to be addressed asap.
You should always begin the state legal process immediately upon rent being late regardless of who the tenant is "just in case". Wasted time is potentially lost money especially in light of the fact that the majority of landlords seem to maintain the defeatist attitude that they can not collect from tenants in default.
I always send notice on the second of the month and in the case of a tenants second late payment that notice comes with a $170 fee. The ability to impose that immediate cost to tenants is probably the only good thing about our landlord tenant codes.
I am curious, if rent is due on the 1st and late on the 2nd why do you stall the system for 5 days before sending the pay or quit. Legally, and for your own protection, you should be issuing the pay or quit on the 2nd, long before the late fee is in effect.
The time from the 1st to the 5th is not a rent free grace period it is a late fee grace period. This is something that way too many landlords do not understand. Your tenants are using you as a bank to borrow your money without your consent. It needs to be addressed asap.
You should always begin the state legal process immediately upon rent being late regardless of who the tenant is "just in case". Wasted time is potentially lost money.
Because weekends, holidays, or pay periods don't always line up with rental due dates. While contractually we are afforded rents being late on the 2nd there is no point in wasting money on certified notice just to be paid a few days later. We don't take action till the 5th, as 90% of all rents are paid by that time. We then apply fees on that last 10% of tenants, and by the 10th we apply certified on anyone with a $200+ balance.. by the 15th we apply court filing on anyone with a $400+ balance. That 10% are always playing catchup for whatever reason, which becomes a very lucrative side business when your operating hundreds of units. The 10% can generate up to around an additional $630 more per year for all units in a portfolio. So if you have 200 units, your talking $126,000 in an additional earnings. When your at scale, this business is not about evicting people, it's about managing the performance of the asset, much like a credit card company would. When the people no longer can afford to pay, then you cut them off.
@Levi T. Does your state not permit the notice to be posted on the door. Certified for the first notice seems excessively restrictive. Unless your state regulations clearly indicated "business days" weekends and holidays are irrelevant. I have never heard of any jurisdiction that moves rent due dates because of weekends.
I hear what you are saying regarding additional income however operate at scale results in time and staff expenses (even your own) that will far surpass that income. Invariably tenants that consistently pay late will deteriorate into expensive evictions and property damage that many landlords do not understand impact that "free money". The number of late payment tenants that escalate to eviction costs generally cancel out any financial benefits of late fees. Training tenants to not pay late is financially more beneficial in the long term that any perceived bonus from fees.
Late fees are not intended as a bonus. They are intended as a deterrent for tenants and to cover a landlords additional costs. To view it as a plus is reverse thinking in a business that relies very heavily on financial efficiency. Managing performance requires eliminating problems not living with them. Time is money.
Check your books again, you may be wrong regarding the benefits or will be in the future.
@Thomas S. Virginia is a very LL friendly state, but clearly posting on doors is not efficient when your operating hundreds of units. My people don't have time for that. Everything is automated around here, all the way down to the notices, fines, fees, etc. We even hire a call center to handle tenant request and route repairs. Rentals applicants roll in by the hundreds daily, and are feed into auto-responders and chat AIs.
If you really think that your going to run a business and never have late pays and defaults, you got a lot to learn. No matter how good anyones credit is, someone will miss a pay date on any timeline, and if you want to run out the door on day 2 demanding payment with certified notices and court orders, your going to be doing a lot of work just to pick it up a few days later because it was floating around in the mail, or the tenant gets their paycheck 3 days later.
My business operation is backed up by data, we don't do what we do because we are lazy or don't know what we are doing. Dates, times, notices, fines, everything, is AB tested over and over. We can take some of the worst performing assets and turn them into home runs like clockwork. We are one of the best in the business.
I just can't imaging the man power it takes to deal with delinquent tenants. You must have a full time staff assigned to late collections.
I am obviously small time but for me it is far more cost effective to prevent late payments, through strict training practices, than to have to process them.