Congratulations—your units are filled, leases filed away and tenants moved in. Now it’s time to sit back and collect the rent, assuming it comes in on time.
Having to deal with late and unpaid rent is one of the biggest headaches a property manager faces. Missing rent payments wreak havoc on cash flow, especially when there are mortgages to cover. And it doesn’t take too many missed payments to vaporize profitability.
Smart landlords and property managers know that careful tenant screening will minimize their tenant delinquency rate. It pays to run a credit check, call references and make sure the prospective tenant’s income is at least 2.5 to 3 times the monthly rent. If all these things check out, you probably won’t have too many problems.
Unfortunately, however, there’s always that exception. A tenant’s situation can change overnight due to unforeseen circumstances such as a health crisis, job loss or divorce. Here are a few suggestions to help you handle such a situation.
Keep it in perspective
It can be easy to get drawn into a tenant’s problems, especially if it’s a long-term tenant with whom you have enjoyed a good relationship. However, don’t lose sight of the fact that it’s a business relationship. Be compassionate but clear about your limits. “It takes us a long time to find tenants and we have a lot invested in them, but as a landlord your job is to provide shelter,” says Frida Waara, a landlord and real estate agent in Marquette, Michigan. “You’re not in a position to be their banker.”
Set a policy and stick to it
Having policies and systems in place will take a lot of the stress out of dealing with nonpayment of rent, if and when it becomes an issue. You can implement the following sequence to reduce your incidence of late payments and handle any ones that do occur smoothly:
• Rent reminder—One to three days before rent is due, email or text a reminder. This will help keep forgetful tenants in line. It will also send a signal to your tenants that you are keeping a watchful eye on their behavior.
• Late rent notice—The day their rent is late, send them a written notice. Email them, text them and/or post a note to their door. It doesn’t hurt to include a copy of the lease with the violation highlighted.
• Phone call—A day or so after the late rent notice, do your best to talk to your tenant in person. Be friendly. Try to determine why the rent is late. Sometimes people just forget and appreciate the reminder. Or they might be experiencing a temporary cash-flow problem. Staying calm will help keep your relationship professional and encourage them to treat you with respect. Limit yourself to one call to prevent accusations of harassment.
• Notice to quit—Before an eviction can proceed, most states require a written notice to be given to the tenant demanding that the lease violation (including nonpayment of rent) be remedied or the tenant moves out. Be sure that you are in compliance with all legal requirements concerning this notice.
• Eviction proceedings—If you have followed all of the above steps and the tenant still doesn’t pay, you may be forced to evict. Again, be sure you are doing so in full compliance with the law.
Implement late fees
Late fees are an excellent tool for encouraging on-time rent payment. However, you do need to be aware of any legal restrictions on late fees in your state. For instance, not every state allows late fees. Many others cap the amount you can charge for late rent. If your state does not allow late fees, you can structure it as a good-tenant discount, in which the official rent is set high, and they get a break on the rent when they pay on time.
Before entering into any agreement with tenants, be sure you know your rights and your tenant’s rights. Be aware of the law, and go over your lease and policies to be sure you are compliant with it. Your lease is critical. Try to anticipate any potential problems and include clauses in the lease to address them when possible.
It’s also critical to inform your tenants upfront about your policies and how they comply with the law. At the lease signing, go over the lease point-by-point and make sure your tenants are clear on your policy. Don’t assume they understand it the way you do. For instance, many landlords allow a three-to-five-day grace period after the rent due date before they charge a late fee. If you don’t, be sure to stress the fact.
It’s OK to be human
Good people sometimes need a helping hand. It can make sense to work with a good tenant who suddenly runs into financial trouble. You might find that showing some leniency at times is the right thing to do. If that is the case, proceed with caution. Here are some tips:
• Take credit card payments. Some landlords are unwilling to pay the extra fee associated with credit card payments. However, if it allows the tenant to bridge their financial gap and gets you paid on time, the small fee can be well worth it. If you are not normally set up to take credit cards, consider accepting a payment on a one-time basis through PayPal or a similar service.
• Set up a payment schedule. If tenants have gotten behind on rent, it may be easier for them to catch up by paying on a weekly or biweekly basis.
• Document everything. If you work out a solution with tenants, don’t just rely on their word. Put everything in writing and have them sign it. It’s also a good idea to keep a log of all contact with the tenant, including phone calls, texts and emails.
• Be consistent. Once you have a routine in place, stick to it regardless of the tenant. You may have favorites, but you could get into legal trouble if—for example—you send a notice to one tenant three days after the rent is due, but send one to another tenant two weeks afterward. If you make an exception for a tenant, be sure to document the exact reasons and circumstances that lead to your deviation from the rule.
• Don’t let it go too long. “It’s a slippery slope,” Waara says. “There could be serious consequences to letting it go too long because your expenses continue to accrue in the meantime.”
Regardless of how you choose to approach late rent payments, keep in mind that you set your own precedent. If you let the rent slide one month, your tenants will expect the same from you the next month. Keeping your lines of communication and your expectations clear will go a long way toward maintaining a peaceful and profitable relationship with your financially stressed tenants.
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