Motivating Tenants to Pay on Time
As a Property Manager one of your most important tasks is to ensure that Tenants pay their rent on time. This in turn allows you to pay the Owner their proceeds on time which keeps them happy.
Not receiving rent on time means more work for you. You have to start following up with the Tenant to ensure they pay. You’ll also have to spend time sending them any required documents (e.g. Notice to Pay or Quit) in order to start the eviction process.
Both of these tasks will probably be in addition to inquiries from the Owner wondering where their proceeds are – talk about a lot of wasted time for all parties.
There are two theories on how to motivate renters to pay online:
- Offer a discount if rent is paid early
- Charge a late fee if rent is not received on the due date
Both have their own disadvantages and advantages that we will discuss below.
Offering Discounts vs. Charging Late Fees
Sure everyone likes to save money, that’s why stores have sales – everyone likes to think they are getting a deal. So the thought here is, if your tenant has enough to pay their rent early offering a discount encourages them to pay in order to receive their rewards (reduced rent). If you could pay any of your bills now and save even just a dollar, wouldn’t you?
Paying rent early to receive a discount is great for those that do have their rent money. But what about those that don’t have the money for rent when it becomes due? They simply can’t pay their rent early. In this case the deal isn’t even an option for them. Here, your job as a property manager is to ensure the tenant plans better for the future.
your job as a property manager is to ensure the tenant plans better for the future
One way to do that is to charge a significant enough late fee that the tenant ensures that they always have enough cash on hand to pay their rent. You do have to be careful when charging late fees to ensure that you are following your states rules on the maximum amount of the late fee, how the late fee must be stipulated (in the lease), and how long of a grace period the tenant may be obligated to.
Progressive Late Fees
Some property managers find that simply charging a flat late fee still doesn’t encourage the tenant to pay rent any sooner. Since the tenant has already incurred the late fee there isn’t necessarily any motivation for them to pay on the 4th instead of the 30th (starting the eviction process would be an exception). This is why some property managers stipulate a late fee as well as a day-to-day penalty for each additional day rent is late. Progressive late fees will help motivate the tenant to pay rent as soon as possible. Again, in this case make sure you are following your state's rules and are keeping the late fees reasonable.
So What’s the Best way to Ensure your Tenant Pays Rent on Time?
Only allow the minimum grace period required by your state. Assess late fees immediately and consistently. Consider a progressive late fee structure to further motive your tenants to pay as soon as possible.
Be proactive by adding terms to your leases stating that rent must be paid via direct debit. Direct debit from tenant’s accounts is easy with property management software that allows tenants to pay online. This makes it easy for tenants to pay on time and, in the case of Rentables, saves you time since the bookkeeping will be done for you automatically. Stop for a second and think about how much time you can save collecting rent via direct debit - no following up to see when rent will be paid, no trips to the bank to deposit checks, reduced data entry...
Allowing tenants to pay by credit card is another option. Credit card processing does incur a discount fee that usually varies from 2.5-3% of the transaction amount. But in some cases this discount fee will be less than the late fee itself so tenants are motivated to pay via credit card despite the large fees.