To survive as a landlord, you must also get your tenant not only to pay the rent, but to pay it on time. After all, most mortgages are due on the 5th of the month. If you rely on rent to cover your mortgage and other mandatory and scheduled payments, you will need that money deposited in your bank by then, or you will be the one paying penalties and extra interest to your bank!
Yes, life happens. Tenants incur occasional problems. That’s a fact of life in the residential landlording business, no matter where you are. But there are ways to minimize the frequency and severity of late rent payments.
By far, the best and most effective way to ensure your tenants have the ability to pay rent in a timely manner is through effective screening. An ounce of prevention is worth a pound of cure. And the best predictor of a tenant’s future ability to pay rent on time is his or her track record over the last few years. To learn more about screening tenants, check out another Ask A Pro question: Q: How do I develop a tenant screening process?
Here are some things to screen for:
Are the applicants who they say they are? If they say they are moving in from Oklahoma, the credit report should reflect that. Beware of discrepancies between what they tell you and what the credit report says.
Past residency stability. Do they move every six months? It could be because they can’t pay rent and skedaddle – even with no evictions on their record. They may not hang around long enough for an eviction.
Do they owe money to other landlords? Whether they owe back rent or caused property damage, this is a big deal. Are they making payments or handling it responsibly? Or trying to skip out on their obligations?
Use a credit reporting service. References are easy to fake.
FICO scores are good, but you should be most interested in rental history. If the tenant has a history of paying late on credit cards to ensure she pays her rent, that’s not a terrible thing, from your perspective.
Note that FICO reports will also include eviction judgments and bankruptcy information, which is useful to know.
Look for regular, reliable income at least equal to three times the rent amount. This is not always the norm in very expensive markets, but for most of the country it’s reasonable.
(Remember that if you decline a tenant based on credit score information, you must notify them with the name and address of the credit reporting firm that provided you with their information. This is a Fair Credit Reporting Act requirement.)
- Use automatic payments, like online bill pay and ACH drafts. This eliminates human error and forgetfulness as a source of problems.
Note that you don’t always receive immediate credit for automatic payments. There could be a 2-3 day delay before the money becomes “spendable” in your account.
- Say thanks. Drop a ‘thank you’ note, handwritten, thanking your tenants for paying on time. This lets them know that their promptness is important to you, before there’s a problem.
- Incentivize promptness. 12 on-time, stress-free payments in a row? That tenant is a valuable asset. You want to keep people like that. Consider an acknowledgment, such as a gift certificate for dinner for two at a local romantic restaurant. Or take off $100 dollars on the rent, if they hit 12 on-time payments in a row. Other ideas include gift baskets or Starbucks cards.
- Cut slack. Once. Forgive one late fee if circumstances warrant. But take the opportunity to walk the tenant through how it harms you when rent is late, and to go over the consequences of another late payment.
- Charge and enforce a late fee, which should be disclosed in detail in your lease document. Do not make exceptions, except pursuant to a written policy.
- Late fees should reflect your costs. You could incur penalties and late fees yourself if you cannot not pay bills on time because your tenant has not paid yet. Set the fee high enough that you are fairly compensated for your costs and the time and effort in collections and pre-eviction procedures incurs, but not so high that you are hoping a client pays late so that you can collect the late fee.
- Make it impossible to bounce a check twice. Insist on payment in money order, credit or debit card. This is a common way of dealing with tenants who bounce rent checks. Avoid cash payments, though.
- Increase rent on chronic late payers at the conclusion of the lease.
- Do not renew leases of chronic late-payers.
- Be consistent. If the tenant doesn’t pay, you start eviction proceedings. Like clockwork. There is no emotion in it and it’s not personal. Just business. Other tenants, if any, will see it and get the message.
- Report. Help protect other landlords by reporting problem payers. Inform tenants in writing, at the beginning of the lease, that late payments are reported.
The Bottom Line
Be professional and detached. Yes, you may personally like the tenant. But this is a business relationship first. You must look out for your financial best interests. Communicate regularly, and whatever you do, don’t ignore the policies and standards you set, because when you do you immediately set new and lower ones.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.