Investment Property Rent Collection
Being a successful investment real estate owner requires being good at and having a system for rent collection.
Unfortunately, I often run into investment property owners that are complaining about how their tenants don’t pay or don’t pay on-time. Despite my best encouragement, they still can’t/won’t take a systematic approach and a tougher stance on collecting rent.
Let me give you an example: Have you ever been late on your mortgage payment for your investment property? The bank doesn’t wait 10 days after the missed payment before they call you. With all the foreclosures these days, they will often call you the first day it is past due (even if that is a weekend). The bank also wants a serious and direct answer as to when you are going to send the payment. They don’t care about [insert any number of 100 excuses tenants give you]. They want their mortgage payment and will continue to call every couple days until they receive it or else. Additionally, they will also charge you a late fee every time the payment is late. Their computer billing system just adds it on.
As a landlord, you need to take the same approach. The goal is not to be a jerk to the tenant (as you want to keep happy tenants), but also not be walked all over with every excuse. Here is the rent collection process that I use. [One note: I do vary this process slightly depending upon the tenant. I have had great tenants that always pay on time lose their jobs. In that circumstance, I work with them to get caught up on rent. Conversely, once a tenant does not live up to their commitment, I follow the policy to the letter.]
- My leases require rent to be paid by the 5th of the month.
- On the night of the 5th, I automatically charge late fees on all outstanding balances (both current month and past months). In some months, I will collect $300 in late fees.
- On the 6th, I review the mail for any rent checks that come in. I enter those and I run an open invoices report in Quickbooks. This report shows me anyone that has an outstanding balance with me.
- That afternoon I call anyone that has a past due amount. Most tenants that owe answer the phone and know exactly why I am calling.
- I ask each tenant to commit to when they are paying their rent. I write those dates and amounts down on my Quickbooks report, which I then tack right above my computer.
Now if it were that easy to collect rent, everyone would do it! Here are some tips on how to insure you actually receive it:
- If a tenant owes a total of one month’s rent on the 15th of the month, start the eviction process. If they do not pay, you should be able to use their damage deposit to pay their back rent and lose only the next month’s income while you are looking for a new tenant.
- One investment property owner that I know, actually drives around to each property and collects rent in person. He says that it insures that he gets the rent and he takes a minute to walk through each unit to see what is happening. If your properties are in the same area, this may help your collection process.
- Require the tenant to send as much as they have immediately and then work on the back rent. I have had a couple situations where the tenant says they are $200 short and are waiting to get the remainder of the rent. When I finally offer to drive over and pick up the partial rent, it turns out the really don’t have any of it. It is better to know that on the 5th of the month than on the 15th-[start eviction now].
- If the tenant is on Section 8 or other subsidy, you may have some additional leverage as an eviction can cause them lose their subsidy. Don’t abuse this leverage, but politely remind them.
- When I get a tenant that doesn’t know when or how they are going to pay rent, I immediately file the eviction paperwork. My history has shown me that if they don’t know where they are getting the rent by the 5th, they are not going to know anymore by the 15th.
- Lastly, maybe your problem is actually that you need to do a better job of screening your prospective tenants before they become tenants. If they had payment problems in the past, it is most likely they will have payment problems with you.
These are just some tips and tricks that I use when collecting rent. You will develop your own style and processes. By standing firm and getting what is yours (the rent), your investment property business will be successful and bring you the goals that you set when you bought that first property.
This is really a good post on conducting business properly with rent collection and tenants. I am going to refer to it in a post.
How do you handle owed late or NSF fees? If you have fees owed and the tennant pays only the next months rent can you take the fees out of their deposit? Deduct the fees first rent second and then charge them another late fee because they came up short?
I always use the current payment to pay any past due amounts, except when the money is coming from an agency. Then I use it to pay whatever they tell me it is for.
I suppose a guy could charge a $30 late fee because they did not pay the $30 late fee, but I just let it ride and get it eventually when they clean up the account.
Unfortunately, most tenants that are late once will be late again. I will get it eventually.