Many would say that one of the downsides of real estate investing is becoming a landlord and having to deal with property management and… tenants.
When we teach property management for higher returns, we cover a concept we call “The Four Horsemen of Rental Returns.”
The four evil forces that will wreak havoc on landlords’ returns are:
- Rent defaults and evictions
- Turnovers and vacancies
- Maintenance and repairs
- Lawsuits
Most landlords nod along and say “Sure, yeah, they’re bad” and completely miss the point: Their entire property management system should revolve around minimizing or eliminating these four risks and expenses.
These are where landlords’ returns are made or broken. When asked how to raise their returns, the average landlord will jump straight to brainstorming ways to raise the rent. But raising the rent is only a small piece of the puzzle.
The greatest impact on landlords’ returns can be found in minimizing these irregular but massive expenses.
Here are seven tactics to eliminate rent defaults and evictions, and keep your tenants paying the rent like clockwork month-in and month-out.
Set Expectations by Defending Your Lease’s Boundaries
Tenants will push your boundaries. It’s human nature to see what we can and can’t get away with.
This month they may pay the rent on the third of the month. Next month it’s the fifth. The month after? The seventh.
Too many mom-and-pop landlords let late rents slide. They accept excuses and sob stories, rather than enforcing the rules established in their lease contract.
All the while, they send a loud and clear message to their tenants: “You don’t have to comply with my lease contract because there are no repercussions for breaking it.”
In most states, there is a defined and mandatory grace period. In Maryland, for example, the law requires a five-day grace period. If the rent is due on the first, that means it cannot be officially considered late until the sixth.
If a landlord wants to prevent late rent payments in the future, they must do two things on the day the rent officially becomes late. First, they must charge a late fee (more on this momentarily).
And second? They must serve an official eviction warning notice to the tenants.
Failing to do either of these will result in tenants pushing their boundaries even further in the future. They’ll know that they don’t have to prioritize their rent over other bills, because their landlord will let it slide.
Charge Maximum Late Fees Allowed by Law
Most states impose strict, low late fee limits on landlords. Don’t feel guilty for charging the maximum late fee allowed, because it’s already designed to be low (in most states, 5-10% of the rent).
If your state allows per diem late fees, these are even better motivators. Charge a per diem (daily) late fee on top of the initial late fee, if permitted by law in your state.
Bear in mind that your city or local government may impose additional restrictions, beyond your state limits.
Write the late fees clearly into your lease contract and draw your tenants’ attention to them when they sign. Make your new tenants aware up front, in a friendly and professional way, that you take late rent payments very seriously and apply late fees and eviction notices immediately upon the rent becoming late.
Remember, the goal is not to profit from tenants paying the rent late, but to deter late payments entirely.
And never, ever make exceptions for late fees. You’ll hear every sob story in the book about why the rent is late. Some will be true, some won’t. It doesn’t matter: Your late fees should be a force of nature, inevitable. If the rent doesn’t arrive before the grace period ends, the renters owe a late fee, and they’ll receive an eviction warning.
Expectations = set.
Conduct Quarterly or Semi-Annual Inspections
Huh? What do inspections have to do with late rent?
Once again, conducting regular inspections is about setting expectations and defending boundaries. You are sending a clear message that you are not an absentee landlord. That you care deeply about your rental property.
And you will enforce your lease, so the tenants better observe its rules.
That doesn’t mean you need to be a jerk about it. Quite the opposite – when you conduct your regular inspections, it also serves as face-time between you and your tenants. A chance to get to know them better, to ask about their kids, their jobs, their hobbies, and interests. You can build a human connection with them, tell jokes, and double check that everything in the property is working to the tenant’s satisfaction.
When you conduct these inspections, also look for lease violations like undisclosed pets or unauthorized occupants. Check how the tenants are treating your property.
If they are violating the lease contract in any way, send them a lease violation notice.
Your message is clear: You take the property and the lease extremely seriously. The tenants need to respect them just as much as you do.
Offer an Incentive for Early Rents
Who says incentives have to be all sticks and no carrots?
Consider an early rent incentive program, where renters receive $15-50 off their rent if you receive it before the first of the month.
Emphasis on receive; if it’s based on when the renters send it, all you’ll hear is “But I mailed it on the 31st!” The rent is due – in your hands – on the first. To qualify for the discount, your renters need to have the rent in your hands before the first.
Offer an End-of-Year Bonus for 12 On-Time (or Early!) Rent Payments
As an alternative to the early rent incentive, consider offering a holiday bonus/reward if the renters pay the rent on-time every single month of the year.
Better yet, make the qualification that they pay the rent early all 12 months of the year.
If they do so, then they get a $250 gift card to Best Buy, or wherever. (You can even buy these online at a discount through gift card reseller platforms.)
Here’s an even better offer: You could offer the tenants their choice of three property upgrades, if they make every payment early (or on time). Make sure each of the three property upgrade options you offer both are enticing and will raise your property’s value and rentability.
And, of course, make sure they are cost-effective!
Automatically Collect Rent from Your Tenant’s Paycheck
Thus far, we’ve focused on behavior modification and incentivizing renters to comply with your lease.
But what about people constitutionally incapable of managing their money effectively? People who never saw a bill they wanted to pay on time in their lives?
You can take the choice out of their hands, and automatically deduct the rent directly from their paycheck. They get to avoid late fees and avoid the hassle of making payments. (They also get approved to rent your unit, when they probably wouldn’t be otherwise.)
And you get peace of mind that you’ll receive your rent on-time every month.
In the spirit of transparency, I’m one of the co-founders of the company that offers this RentDeduct service, at SparkRental.com. If I sound biased, well, I know how effective it is!
But if late rent payments are a concern for you, consider automatic rent collection, to take full control over when the rent is paid.
Non-Renew the Chronic Offenders
Have a tenant who’s constantly late, and feeding you excuses?
Get rid of them.
Or, you can always offer them a choice: If they want a lease renewal offer, they need to switch to having their rent deducted from their paycheck.
Just because a tenant pays the rent eventually doesn’t mean they’re not a risk. When it comes time for them to move, do you think they’ll magically write you a check for all of the back rent they owe you?
Hardly. They’ll disappear in the dead of night, leaving your property a mess, because they know they won’t be getting their security deposit back anyway.
Non-renew any renters who you’ve had to serve eviction notices and be chased for rent. Especially non-renew anyone who you’ve had to file in court for eviction.
There are too many honest, responsible, hard-working renters in the world for you to waste your time chasing down deadbeats. When their lease term end date is approaching, send them a friendly and professional non-renewal notice, and replace them with a renter who will honor your lease contract and pay you on time.
Skip the Paper Chase
You didn’t become a landlord so that you could chase people down for unpaid bills.
A lease contract is an exchange: The renters makes use of your (expensive!) asset, and in return they pay you a monthly fee. You hold up your end of the bargain. You don’t tell them “Sorry, I need you to find somewhere else to crash for the first eight days this month, I need to use the property for myself.”
So, why should you have to listen to “Sorry, I won’t pay you until the 8th this month?”
Set expectations clearly that you will enforce the lease agreement. That you respect the lease agreement, you respect the property, and you expect them to do the same.
Most renters will take the cue and behave accordingly. A few won’t, and it’s your responsibility as a landlord to either force them to comply or remove them from your property.
Sound harsh? This is the business that you’ve entered into, and like any business, it hinges on all parties honoring their commitments and contracts. In no other business are companies expected to accept late payments without consequences.
You have the same rights as other business owners. Defend those rights, and in return, you’ll find that your tenants respect you all the more for it.
This article has been contributed by our friends at Spark Rental.
SparkRental services include automatic rent collection, free videos on multifamily investing and property management, state-specific lease contracts, and full tenant screening reports.