I didn’t choose the landlord business; it chose me. And since I didn’t plan on being a landlord, I didn’t know what I was doing. The first lesson I learned was that I should never let tenants pay their rent late. Unfortunately, I found out the hard way.
Because I didn’t know I’d need to find a tenant for my new rental, I was grateful when a friend of a friend knew a couple who wanted rent my place. Since the applicants came to me through a friend, I didn’t think I needed to screen them. First mistake. (Now I know I should always screen tenants.)
At first, things were great. Even though I lived across the country from my new tenants, we regularly exchanged recipes. I’d say we became friends. Second mistake. I should’ve thought of The Godfather Part III. “Friends and money—oil and water.”
When my tenants were two weeks late with the rent, I let it go. After all, they’d given me a great recipe for spaghetti sauce. But because rent was late that month, my tenants had a hard time coming up with the next month’s rent three weeks later. So the rent was late again the next month, then even later the following month.
Although my tenants were paying rent, the money came in sporadically. Soon, I was getting rent every six or seven weeks, instead of every month. Before I knew it, rent payments were six months behind.
Owning rental properties can be a profitable business if you manage your cash flow well. And the most important thing you can do to positively affect your cash flow is to collect rent on time.
But here’s the reality: at some point, you’ll probably have a tenant who pays rent late, or not at all. Make a plan now to help prevent late payments and handle tenants who have trouble paying rent.
1. Make it automatic
Requiring tenants to make automatic rent payments is the best way to collect rent on time. There are multiple ways you can set up automatic rent payments:
Bank-to-bank transfers (ACH)
Use an Automated Clearing House (ACH) to withdraw money from the tenant’s bank account. To authorize this transaction, the tenant signs a document that allows the landlord to withdraw a set amount of money on a recurring basis.
The downside: if a tenant doesn’t have enough money in their account to fund the withdrawal, the draft will bounce, you won’t get paid, and tenants will pay a bank fee. Transferring money from a bank account usually costs $0.50 to $3 per transaction and takes four to seven days to process—so it’s not the quickest solution for collecting rent—but it’s the easiest.
Online bill pay
If you don’t want to set up payments from a bank account, you can ask your tenants to set up their rent payment as a recurring bill with their bank. That way, the bank issues a check and mails it to you automatically every month. Or if you’re also a member, simply direct deposits the money into your designated account. All major banks have an online bill pay feature, but if you decide to go this route, you may still have to deal with the hassle of receiving a paper check.
Designed for landlords and tenants, Cozy lets you start collecting rent online in less than two minutes. Tenants can choose to set up auto payments, and they can make payments from their bank accounts or a credit or debit card. Best of all, bank-to-bank transfers are free for everyone.
You can also add other miscellaneous charges, such as utility fees, parking, storage, late fees, etc., and roommates can easily split charges and monthly rent.
The old-fashioned version of automatic rent payments is to collect 12 post-dated checks at once, one for every month of a year-long lease. Then, you’d deposit one of the checks on the first of every month.
It’s a simple solution, but tenants typically feel uneasy about handing over 12 months of rent all at once—especially to a landlord they just met. Using this technique will likely scare away the types of tenants you would want to attract.
2. Choose your tenants wisely
Only rent to qualified tenants with a great rental history, a good credit score, and a reliable background check.
Set your criteria
Be clear about the criteria prospective tenants must meet. Discrimination laws state that you must hold the same standards and criteria to all tenants. If you require your tenants to have an income three times the rent amount, for example, all applicants need to meet that requirement to be eligible.
Always require applicants to provide you with their credit report. This lets you know whether the tenant has eviction judgments and past debts. You’ll also discover how they’ve been paying other creditors. Some people will have an excellent history of paying bills on time, but others will have less than ideal payment habits.
You will want to know if your applicant has a history of being evicted. A detailed background check is the best way to gain this information. It’ll also tell you if the applicant has any criminal charges against them, or if they’re on a sex offender registry or terrorist watch list.
Verify the application information the tenant provides you. Call the employer and past two landlords. The current landlord won’t yet know how the move out went. Did they trash the place? Did they skip out on the last month of rent? Prior landlords will know.
3. Create a “no cash” policy
Accepting cash as a rent payment is not a good idea. Cash is too easily lost, and you can’t create a paper trail if you accept cash.
If you go door-to-door to collect cash, it won’t take long for word in the neighborhood to spread that you’re carrying thousands of dollars every first day of the month.
You can eliminate these risks by letting tenants know you don’t accept cash for rent payments. Let your tenants know the ways they canmake their monthly payments, such as check, money order, or direct debit. Remember to communicate these details in your lease or rental agreement.
4. Enforce your rent collection policy
To ensure regular, timely rent payments, keep your collection policies firm and consistent, something I now do with every tenant.
In your lease, address all payment-related issues. Include:
- The exact amount due and the due date
- Where payments are to be made
- Acceptable payment methods
- When you start charging late payments
- The consequences of not paying rent on time
At some point, you may feel sorry for a tenant who has fallen on hard times, or you may feel uncomfortable charging a late fee. If you want to cut your tenant some slack, you can waive the late fee the first time they’re late.
Be firm about your policy if they’re late a second time. Let them know that they must pay rent on time, or they’ll be charged the late fee specified in the lease. Be clear about what happens if they fail to pay those late fees.
5. Ask questions
If your tenant doesn’t pay rent, ask these questions to figure out what’s going on.
- When do you plan to make a payment?
- Where will you submit your payment?
- What is the exact amount you will be paying?
- What will be your method of payment?
- What’s the source of income you will be using to make your payment?
If they’re evasive and haven’t paid rent, serve them with a “Notice to pay or quit” (also known as an eviction notice) the next day. Check your state laws to find out the amount of time required by law for the notice before you file for eviction.
Generally speaking, if you think you’ll have to take a tenant to court, you should send them a “Notice to pay or quit” via certified mail so you have proof of receipt. In the meantime, you can communicate your intent by simply taping a piece of paper to their door saying, “Pay past-due rent” or “I’m evicting you.” This type of note might be enough to scare them into finding the money. It’s not official, however, until you mail your tenant a formal letter and send it via certified mail.
6. Help them understand they can build credit
If you want to set yourself apart from other landlords, you can help your tenants build their credit if they pay their rent on time. Many online property management tools help tenants report their on-time rent payments to the three credit bureaus, which is a good way to build and repair credit, especially for people who don’t have any credit to begin with. It’s also an incentive for tenants to set up automatic online rent payments, which is one of the best ways to ensure you get paid on time.
If your tenants are making payments through Cozy, they can choose to report their Cozy payments to Experian, which can positively affect their credit histories.
7. Reward responsible tenants
A critical part of managing a rental property is holding onto good tenants. Sometimes landlords can be so focused on preventing unwanted situations that they overlook the renters who make the job great.
If you have a tenant who always pays rent on time, abides by your rules, and takes good care of your property, show them how much you appreciate them with an Amazon gift card or a fruit basket.
Send them the gift at the right time, such as after they’ve paid a year of consecutive, timely rent payments. They’ll be delighted, and you’ll have a better chance of keeping them as your tenants in the long run.