Whether you manage 20 rental units or 200, collecting rent on time is a constant challenge. All veteran property managers have heard their share of excuses for why a tenant's rent is late. No matter whether the excuses are plausible or fantastic, one fact remains: It is your responsibility to collect full rent from every tenant, every month, on time. Delinquencies are damaging to a property, in both the long and short term.
The danger of delinquencies The average rental property's cash flow depends almost exclusively on monthly rental income. That means the funds you collect from tenants are promptly redirected to the property's mortgage holder, insurance carrier, service vendors, utility companies, and employees -- sometimes with little surplus remaining.
Therefore, unless your property has cash reserves, late rental payments can cause a serious dilemma. If the delinquency rate is high enough, your property may not be able to cover expenses in a timely manner. Since lending institutions, utility companies, and many vendors assess hefty late fees -- often a percentage of the amount due -- this can serve to increase operating expenses and depress profits.
No matter whether the excuses are plausible or fantastic, one fact remains: it is your responsibility to collect full rent from every tenant, every month, on time.
Another problem with delinquencies is that they tend to escalate. If you consistently allow a tenant to be two or three days late with rent, he or she will eventually stretch that to four or five days. If you overlook a delinquent payment once or twice, tenants come to believe that being late is acceptable. Finally, if you make an exception for one or two residents, the word will get out and others will demand the same. In short, any time you do not take delinquencies seriously, you are standing on the proverbial "slippery slope."
Reducing delinquencies: deterrents and incentives Of course, the best possible scenario would be one in which your tenants all paid on time, every time, making late notices -- and this article -- unnecessary. While you may never achieve that utopian state, you may be able to at least reduce your delinquency rate by giving tenants some good reasons to pay promptly. There are two main ways to induce on-time payments: deterrents and incentives.
Deterrents Deterrents typically take the form of late fees. Many properties assess per-day fees for every day that the rent is past due. Others give residents a short grace period -- for example, five days -- and then charge a flat late fee of $20 or $25. Laws regulating such charges vary from state to state, so you must always make sure your property's policies comply with the law.
Late-fee policies work well in some cases, but they can be hard to enforce. Often residents who have racked up charges tend to "forget" to add those fees to the total of their rent check. If they do this consistently, they eventually end up with a fairly large balance owed on their account. You may be able to deduct those fees from their deposit at the end of the lease -- but that may leave little or no deposit remaining for cleaning and repair charges.