Have a tenant who never saw a bill they liked to pay on time? What can you do about it, beyond mailing late rent notices and crossing your fingers?
First, a discussion of late rent fees is in order. If you don’t charge late fees, you should, and the maximum amount allowed in your state, province or municipality. Sometimes this is a percentage (5-10%) of the rent, or it may be restricted to what’s “reasonable” (i.e. whatever the judge ends up thinking is reasonable). The most restrictive laws require late fees to be directly related to the landlord’s expenses incurred due to the late rent (for example, the late fee the landlord pays on their mortgage).
Regardless, make sure your lease agreement includes clauses explicitly outlining what the late fee is, and when it becomes due (commonly after a five day grace period, but this too varies by state, province and municipality). Charge the maximum allowed by law, on the earliest day allowed – you can always forgive late fees later on a case by case basis, but you can’t raise them.
If the rent hasn’t been received on the first of the month, send a late rent notice that day, clearly warning them of the impending late fee. The first day the grace period expires and the late fee becomes due, send an eviction notice (this doesn't require you to evict, it's just the prerequisite for filing in court). With luck, the tenant will shape up and start paying the rent on time to avoid future late rent fees.
If your tenant consistently pays the rent on, say, the 15th of the month and includes the late rent fee, then it’s worth pausing to consider whether their tardiness is actually a problem. Perhaps it’s worth a few weeks’ delay, to receive the late fee on top of the rent.
The bigger problems arise when tenants consistently don’t bother paying the rent, and have to be chased for it. Filing eviction is expensive and time-consuming, and unfortunately is often the only way to force grudging tenants to pay what they agreed to in the lease agreement. Then you have to try to collect the rent, the late fees, the eviction filing costs, any back utility payments… it quickly snowballs to an accounting and collection nightmare.
If your tenant is one of these, always serve an eviction notice to start the eviction process the first day the rent is late. This isn’t personal, this is business, and in business people pay each other on time, or they face the consequences. If the resident sees that you mean business and serve eviction notices like clockwork, they may think twice before under-prioritizing their rent in the future.
Enough talk of sticks though; what about carrots? Are there ways to incentivize tenants to pay early?
When you first sign the lease agreement, consider making the following promise: if the renter makes every rent payment early every month throughout the year, you will agree to renew their lease term for another year, with no rent increase. This both incentivizes early rent payments, and sets the expectation that you will likely raise the rent after the lease agreement expires if they don’t prioritize making rent payments early. Added bonus: if they make the rent early each month and earn a second year with no rent increase, they're more likely to actually stick around the second year, helping you reduce your turnover and vacancy rate.
Another doubly beneficial incentive is to call the renter periodically and ask them what upgrades or repairs they would love to see in the property, in a perfect world. Be careful to explain that you don’t have the money for any upgrades right now, but you’re willing to look into the upgrades they mention. After hanging up with the tenant, review the upgrades they mentioned: which one would deliver the most return on investment, in higher market rents and higher property value? A washer/dryer hookup, perhaps? Bamboo flooring instead of carpet? Granite countertops in the kitchen? A smart thermostat controlled by a mobile app? Do your homework, and when you’ve selected an upgrade you think will make the property more rentable in the long term, call the tenant back and make them an offer. If they pay the rent early, every month for a year, you will make the property upgrade they requested. If they miss the rent due date even one time, the twelve month countdown starts over.
While not as productive as the two options above, another approach is to offer a cash reward in December every year, if the resident make all twelve rent payments early throughout the year. The cash payment you give to the renter is only a one-time benefit though, a bribe rather than an investment, paying no future returns.
Incentives can be incredibly effective… for the right type of tenant. If the tenant is fundamentally irresponsible with money, no amount of late rent notices, incentives or late fees will magically make them fiscally responsible. Some people simply have a hand-to-mouth mentality, and will not pay any bill until they absolutely must. This type of tenant may leave through eviction, but if they manage to catch the rent up before the eviction date each time, send them a nonrenewal notice before the required notice deadline in your state or province. In the long run, you’ll be much better off with a renter who is willing and able to pay the rent on time, or even early each month!
Have your own landlord tips for handling late rent payments? Share them below!