The first of the month was last Saturday. In the life of a real estate investor, that means payday. In a perfect world, all of your tenants pay on time and in full. Of course this isn’t a perfect world. So let’s talk about what happens when tenants don’t pay on time.
We’ve been fortunate to have collected well over 95% of all the rent and utility payments we’ve invoiced for on all of our properties since we started doing this. The reason we’ve had that success has to do with our “firm but fair” system for rent collection.
Here is my process each month. When a tenant has a balance owing after the 1st of the month, they get a reminder through text or our online tenant portal. It lets them know rent is now late, and if it is over 5 days late there is an 8% late fee (which is the most we can charge in Minnesota). In a vast majority of cases, this reminder is enough to collect rent in full either before the 5th or shortly thereafter.
When rent is not paid in that timeframe, usually we are treated to a story. Those range from “I get paid again on X date” to “I have X additional expense”. We ask them when we can expect rent to be paid, and get them to give us their plan of action. As long as that plan is reasonable and will get us paid up in around 10 days, we let them execute on that plan. At the same time, we also let them know that eviction notices will get filed after 10 days of non-payment.
Here is the “firm but fair” part. Even if the tenant pays according to their plan, but after the 5th, that late fee is assessed and collected. If rent is due and owing after the 10th, we continue forward with that eviction until rent is paid in full (as well as the court costs for that action). There are no exceptions to this process. Tenants get a path to get back on track, but there are increasing consequences the further into the month they get.
When we didn’t have this process in place, what we noticed is that with some tenants if you gave them an inch they took it. So rent would begin coming in later and later, until they started running behind, and then possibly stopped paying all together.
The general wisdom behind this is that if you let someone know that getting paid is not a priority to you, they won’t make it a priority to them either. The reverse is also true. If you let them know that while you are flexible, there is a cost to that flexibility, they will plan their life accordingly.