Like with any business, cash is king. If your vendors and customers are not paying you on time or at all, your business will suffer and may even die. This is the same as renting out your property to a tenant. The tenant is your customer and the customer must pay on time or you can’t pay your bills.
How to Collect Rent On Time
One – Properly Screen Your Tenants
The number one mistake a landlord can make when accepting an application is accepting the application without a credit and background check.
You can come to high probability future conclusions based on past credit history. If a potential tenant has really bad credit, high debt, no job and history of late or non payment, unfortunately, the probability of that behavior continuing in the future is high.
Here are a few tips when reviewing the credit application.
- Set your Credit Criteria: Discrimination laws state that you much hold the same standards and criteria to all tenants. With that said, make sure you have a clear credit criteria process you abide by every single time.
- Income Requirements: The industry average is for the tenant to have at least 3 times the rent in gross monthly income. If the rent is $1,000, the applicant should have at least $3,000 a month in gross income.
- Check References: Always, always call the past two landlords or property managers where the applicant lived previously. Ask if they paid rent on time.
Two – Use the Carrot and Stick Method
You’re most likely familiar with the carrot and stick method, you know a policy of offering a combination of rewards and punishment to induce good behavior.
This works extremely well in collecting rent on time. You can do a variety of things to influence positive behavior in rent collection. Here are a few examples:
- Give a discount
- Notify the tenant that if the rent check is received before the first of each month they can receive a 2% discount on the rent. (Or whatever discount you want)
- Give a discount if they sign up for ACH payments or auto check deposits.
- Give them Points
- Give the tenant points each month for doing things like paying rent early, replacing the air filter, mowing the lawn, etc. Each month, the points can accumulate and the tenant can “cash them out” at the end of the year for money off the final months rent.
- Do a monthly Drawing
- If you own multiple units in a complex or apartment building, you can set up a monthly drawing for a gift for all those who pay their rent on time. Each month, one would randomly be selected to win a gift.
Three – Collect Rent Online
There are a variety of ways to get paid online. Most millennials don’t even won checks and pay everything with a credit card, debit or online banking. Here are a few ways to collect rent online.
- ACH Debit
- Use an ACH (automated clearing house) to withdraw money from the tenant’s bank account each month. There are documents you can get from the bank that will allow you to automatically take out the monthly rent payment from the tenant’s checking or savings account. The tenant must sign and authorize it first.The ACH cost is usually around $.50 to $3.00 depending on the bank and it usually takes about 4-7 days to process. If the tenant has NSF (Non-sufficient funds), the debit will bounce and you won’t receive the money.
- Credit Card
- Although not recommended for tenants, another way to receive payments is to have your tenants pay with their credit card. There is usually around a 2% credit card transaction fee that the tenant would pay but for those tenants that pay off their credit card each month and want to earn miles, this might be the right approach for them.
- Online Bill Pay
- All major banks allow their consumers to pay bills online and the banks send out the checks. What is nice about this is the tenant can set up monthly recurring payments 4 to 5 days prior to the first of the month and the bank will cut the check and mail it you. The tenant can check on the progress of the check and their check records will all be online.
Four – Make Consequences Clear
Within your rental application, make it very clear what the consequences are if the rent payment is received late. For example, you can charge interest of up to 4% of gross rent for each rental payment that is not receive within 14 days of when rent is due. You can charge a one time late fee that is reasonable, usually 3-5 % of rent. You can also charge a daily fee for each day the rent is still not paid. The laws vary by state so check with your local states laws on the max you can charge for late rent. Here is an example clause you can add into your rental agreement.
LATE FEE AND ALLOCATION OF PAYMENTS. In the event that any rent payment required to be paid by Tenant(s) hereunder is not paid IN FULL by the start of the SECOND (2nd) DAY OF EACH MONTH, Tenant(s) shall pay to Landlord, in addition to such payment or other charges due hereunder, an initial “late fee” in the amount of 5% OF THE MONTHLY RENT AMOUNT. Further, a subsequent late fee of TWENTY DOLLARS ($20.00) PER DAY will be incurred by the Tenant(s) for every day payment is delayed after the 2nd day of the month.
All future payments will be allocated first to any outstanding balances other than rent, such as late fees or unpaid deposits. Any remaining monies will be allocated lastly to any rent balance.
Five – Communicate and be a Good Landlord
The easiest and best way to get paid on time, in addition to the above mentioned, is to take care of your tenants. Be responsive when things break. Communicate and be transparent on when things will be fixed. Check in on them once in a while to see how things are going. Again, just like any business, take care of your customers (tenants) and your customers (tenants) will take care of you.