SS166: Effective Rent Collection

SS166 Effective Rent Collection

Effectively collecting rent is an important factor in making your rental property successful. In this episode, Charles discusses effective rent collection strategies.

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Talking Points:

  • Rental properties are very expensive to operate. Review the financials of most rental properties. You will see that the profit margins are extremely tight, usually only 10% (when you factor in debt payments, taxes, insurance, maintenance, etc.) Suppose landlords do not have an effective rent collection process and system. In that case, their property will not only not reach its full potential, but the owners risk it becoming a financial burden that cannot support itself.
  • A key part of our business, especially in the workforce housing arena, is knowing how to collect rent and keep delinquency down effectively. Aggressive rent collection practices can sometimes lead to tenant dissatisfaction and potential legal issues. However, not taking an aggressive enough position can also lead to community blight as the property can’t pay its bills, thus leading to neglect and decline. It’s important to balance effective rent collection and maintaining positive resident relationships.
  • Here are some best practices that we use to reduce delinquency in our apartments:
    • Clear Lease Agreements: We like to use the industry standard lease agreement to ensure that your lease agreements are well-drafted and specify rent due dates, late fees, and consequences for non-payment.
    • Consistent Communication: We send reminders about upcoming rent due dates well in advance through multiple channels, such as email, text messages, and physical notices. An online rent collection portal can assist with this.
    • Online Payment Options: Having rent collection software has been one of the biggest game changers for landlords over the past decade. When I began in real estate investing in 2006, we never had this software, and when I hired my first third-party property manager in 2012, one of the biggest hassles/time sucks was when I had to collect rent. Today, we provide convenient online payment methods to make it easy for residents to pay their rent on time. Online payments are the easiest for both parties. You can set tenants up with automatic payments, which is the best option. We also offer in-person rent payment drop-off. In-person collections are also available but become more important as you move down in property class. You can also mail payments, which is usually not a popular payment method, and landlords should try to avoid this as much as possible. If you do accept checks, make sure to have them deposited ASAP. When I used to get checks, I would drive straight to the bank to deposit them, hoping they clear the tenant’s account the same day or the next morning. Checks can come back months later for insufficient funds.
    • Late Fees: We enforce late fees as stipulated in the lease agreement but do so consistently to avoid appearing overly aggressive. Be careful with late fees and the timeframes. You want there to be 2 levels of late fees. Maybe $50 for up to 5 days late and $100 for up to 10 days late. Be aware that once you allow late rent with a late fee, you have switched hats from landlord to payday lender. I am not saying not to do it; we have tenants that pay late multiple times a year; just be aware of how the relationship has changed. When I self-managed my properties, I would let tenants slide on their first late fee, but it is now more dependent on the property manager and their relationship with the tenant.
    • Offer Payment Plans: In cases of genuine financial hardship, we are always willing to negotiate payment plans with residents to help them catch up on rent. Please note that this can be a very slippery slope; if they have a true hardship, you might opt for this, but make sure it is caught up within a month, or it will snowball. Also, never wait until they have their funds before accepting payment. Take whatever they give you, and never begin a payment plan without some form of payment. If they owe you $1,000 for rent that is due today. Tell them you need something now; let them determine the amount. Usually, you can get 15%-20% of the rent right away. Lastly, it requires weekly payments. Once a tenant shows they cannot pay, you want to start getting payments weekly. You want to collect the remaining amounts over the next 3 weeks. I also am only accepting money orders or cashier’s checks. No more checks. Also, once a tenant bounces a check, our check accepting days with them is over. The truth is that usually, when tenants cannot pay, this is the beginning of the end; in most situations, I have had with tenants and non-payment, they never catch up or begin paying normally.
    • Three/Five/Ten Day Notices: At properties with consistent issues, we provide notices as early as possible that we will be starting the eviction process. While fairly aggressive, this method is absolutely required at some of our properties and contributes to good resident relations.  Many of our folks struggle with being financially disciplined, and they need a firm hand to help them stay in good standing.  Their success is our success.
    • Knocking doors: This is a less than popular method for collecting rent, but it is extremely effective, especially if it is the tenant’s first time late. It sets a precedent of how late payments are dealt with, and it can be extremely awkward when confronted with a creditor. You are really just reminding them of the rent (like they do not know it is late) – and asking when they plan on paying it. You might also want to remind them of the late fee.
    • Tenant Screening: The key to the entire process is proper screening on the front end. We use multiple channels to confirm income, credit, past rental history, etc.  Conducting a thorough tenant screening before leasing is absolutely crucial. Determine your tenant requirements, and never break them. Do not rush to rent a unit because it has been vacant, turnover is very expensive, and evictions make this even more expensive. Make sure they make 3x of the rental amount monthly, confirm they have a clean criminal record or minor criminal record from years past, and meet your credit score minimums.  The only time I have eased rules, usually around credit by 25-50 points, is with a larger deposit; otherwise, we are not budging.
    • If you hire a property management company, interview them intently on how they screen tenants and collect rent, what happens if tenants do not pay, and what they have found to be the most effective rent collection procedures for your property type in your area.
  • We try to understand each situation individually while balancing effective rent collection. This helps maintain a positive resident experience while complying with local laws and regulations.  We reward the responsible residents by ensuring that everyone does their part to maintain a well-run property that all can enjoy.  A property that pays its bills will serve its residents and community best!

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing effective rent collection.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Rental properties are very expensive to operate. Review the financials of most rental properties and you will see that the profit margins are extremely tight, usually only 10% when you factor in debt, payments, taxes, insurance, maintenance, et cetera.

Charles:
Suppose landlords do not have an effective rent collection processing system. In that case, their property will not only not reach its full potential, but the owners will risk it becoming a financial burden that cannot support itself. A key part of our business, especially in the workforce housing arena, is knowing how to collect rent and keep delinquency down effectively. Aggressive rent collection practices can sometimes lead to te satisfaction and potential legal issues. However, not taking an aggressive enough position can lead to community blight as a property can’t pay its bills, thus leading to neglect and decline. It’s important to balance effective rent collection and maintaining positive resident relationships. So here’s some of the best practices that we use to reduce delinquency in our apartments. Number one is clear lease agreements. We like to use an industry standard lease agreement to ensure that your lease agreements are well drafted and specify rent due dates, late fees and consequences for nonpayment consistent communication.

Charles:
We send reminders as re as requested by our tenants of upcoming rent due dates while in advance through multiple channels as they would like, whether it’s email, text messages, physical notices, and an online rent collection portal consists and do all this. Next is online payment options. Now having rent collection software has been one of the biggest game changers for landlords over the past decade, especially for us. When I began real estate investing in 2006, we never had the software. And when I hired my first property manager in 20 12, 1 of the biggest hassles and time sucks I had before handing off my property management was that I had to collect rent and it would take literally a day and a half between coordinating with tenants, picking up payments and so forth. Today we provide convenient online payment methods to make it easy for residents to pay their rent on time.

Charles:
Online payments are the easiest for both parties and you can set up tenants with automatic payments, which is the best option. We also offer a in-person rent payment drop off in-person Collections are also available, but become more important as you move down on property classes. You can also mail payments, which is usually not a popular pay payment method, and landlords should try to avoid this as much as possible. If you do accept checks, make sure to have them deposit ASAP. When I used to get checks, I would drive straight to the bank to deposit ’em, hoping they would clear the tenants account that same day or the next morning checks can come back months later for insufficient funds. Next is late fees. Now we enforce late fees as stipulated in a lease agreement, but do so consistently to avoid appearing overly aggressive. Be careful with late fees and the timeframes.

Charles:
I like there to be at least two levels of late fees maybe $50 for up to five days late and a hundred dollars for up to 10 days late. ’cause You know what happens there is that if someone hits the five day mark and you only have a $50 late fee, they might say, well, let me see how far I can push it past the five days. I’m already paying $50. The next thing to be aware of is that once you allow late rent with a late fee, you’ve now switched hats from the landlord to really the payday lender. And I’m not saying not to do this. We have tenants that pay late multiple times a year. Just be aware of how the relationship has changed. And when I self-manage my properties, I would let tenants slide on their first late fee, but is more dependent on the property manager and the relationship with the tenant.

Charles:
One other point is when you’re accepting late rent and say it’s getting into maybe the second or third week of the month, you’re also now worried about how they’re gonna make next month’s rent. So these are things that take into consideration when doing late fees. You don’t wanna have late fees go out too far. You really want to have them people paying within a week of the due date. Next is offer payment plans. In cases of genuine financial hardship, we are always willing to negotiate payment plans with residents to help them catch up on rent. Please note that this can be a very slippery slope. If they have a true hardship, you might opt for this, but make sure it is caught up within a month or it will snowball. Also, never wait until they have all the funds available before accepting any payment.

Charles:
Take whatever they give you and never begin a payment plan without some form of payment. Something I learned from my father, they owe you a thousand dollars for rent that is due today. Tell ’em you need something right now and let them determine the amount. Usually it’ll be about 50 to 20% of the rent that you can get right away. And lastly, it starts to require weekly payments from that tenant. Once the tenant shows they cannot pay, you wanna start getting payments weekly. You want to collect remaining amounts over the next three weeks. I’m also only accepting money orders or cashier’s checks. No more checks. And this also is a problem too because they give you a check on a Friday, it doesn’t clear until you don’t know, comes back until next Friday, and now they’ve already, you know, on their second payment, they’ve already got behind on you.

Charles:
Also, once the tenant bounced the check, our check accepting days with them is over. The truth is that usually when tenants cannot pay, this is the beginning to the end. And most situations I’ve had with tenants and nonpayment, they never catch up or begin paying normally 3, 5, 10 day notices at properties with consistent issues. We provide notices as early as possible that we’ll be starting the eviction process while fairly aggressive. This method is absolutely required at some of our properties and contributes to good resident relationships. Many of our folks struggle with being financially disciplined and they need a firm hand to keep them in good standing. And when they have success with this, we have success as well. The next one is knocking doors. And this is a less than popular method for collecting rent, and it’s something I did many times, but it is extremely effective, especially if it is the tenant’s first time late.

Charles:
It says the president with them of how late payments are dealt with, whether they’re gonna see you as the owner or the landlord the property manager or a someone that works for one of those, you or the firm. And it can be extremely awkward when confronted with a creditor and you’re really just reminding them of the rent like they don’t know it’s late and asking them when they plan on paying it, you also might wanna remind them of the late fee, but the key is just showing them, showing your face, knowing that, listen, we don’t accept late payments here. You don’t know how it was with their last tenant or the last landlord. Maybe it wasn’t as firm and letting ’em know we firmly pay rent on time here. And you can do that by just showing up to the door. The big thing is tenant screening and the key to the entire process is proper screening on the front end.

Charles:
If this is done correctly, a lot of the issues I just went through can be avoided. And we use multiple channels to confirm income, credit, past rental history, et cetera. Main thing for this is to avoid fraud. There’s a lot of fraud in a lot of metros in the United States right now, and it is people coming in with fake income credentials, all this kind of stuff. So if you can try to confirm it multiple ways this is where you, if you see in the kind of inconsistencies, just say no. Conducting a thorough tenant screen before leasing is absolutely crucial. Determine your tenant requirements and never break them. Do not rush through rent the unit because it has been vacant. Turnover is very expensive and evictions make this even more expensive. Make sure that they make three times of income of the rental amount income every month and confirm they have a clean criminal record or minor criminal record from years past and that they meet your credit score minimums.

Charles:
The only time I’ve eased rules usually is around credit by 25 to 50 points. And this is if they provided a larger down payment. Otherwise, we’re not budging on our our rules. If you hire a property management company, you in interview them intently on how they will screen tenants and collect rent. What happens if tenants do not pay and what they have found to be the most effective running collection procedures for your property type in your area. And if you can figure out and finalize this with your property management company and it’s a solid system that they’ve used of screen tenants and collecting rent, you’re gonna avoid the majority of the problems that I’ve mentioned above. It’s just one of those things that it is the tenant screening is really the beginning of the whole process. And if done correctly, you can avoid a lot of issues and waiting for that right tenant is difficult, but it’s a requirement for success in multifamily housing.

Charles:
Now we try to understand each situation individually while balancing effective rent collection, and this helps maintain a positive resident experience while complying with local laws and regulations. Reward the responsible tenants by ensuring that everyone does their part to maintain a well run property that all could enjoy. A property that pays its bill bills will serve its residents and community the best. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and online mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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