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Collecting Rent

Collecting Rent from Tenants

As an owner of rental property, your primary interest is in making a profit. This is made by collecting more money in rent then you pay out in mortgage and other expenses. Generally, if you end up with a positive cash flow after all of your costs, you are doing well. This is because you will get the added benefit of appreciation on you property.

The key aspect of making a profit is to collect all of the rent due. For some landlords this is not a problem. For others, it’s their biggest nightmare. There are a variety of reasons why this can be difficult. Some include tenants don't pay, multiple tenants share a unit and are difficult to track down, you always get an argument or you didn't make repairs yet. Each of these situations and many others can be very difficult to deal with, but should not stop you from your primary objective, to collect the rent.

While every situation is different, there are several things you can do to limit collection issues.

Make rent payment a habit
When tenants first move into your rental property, you want to make sure they get off to a good start paying the rent on time. Of course you will have gone over the amounts and dates that the rent is due when you discussed the lease terms. But it is in your best interest to get them in the habit of paying on time. One of the worst things you can do is to give them leeway in paying the first months rent late. What you are essentially saying that it is ok to pay the rent late because they had an issue, and the next time they have an issue, you will be equally understanding.

Four or five days before the rent is due, give your tenants a call and remind them when the rent is due, how much it is, and where it should be sent. Let them know that it is a friendly reminder to help them get situated. Do this for one or two months until you feel comfortable that you will get the rent on time.

By getting your tenants in the habit of paying rent, you will help yourself greatly in meeting your profit objectives.

Collect one check per unit
When you are dealing students or tenants from multi-families, you are likely going to get requests for multiple checks to pay your rent. This will help your tenants because they each only become responsible for their own portion of the rent. However, if this leaves you with the onerous task of collecting rent from each tenant living in your unit. If you have 5 students renting a single family home, good luck trying to get 5 checks by the due date every month! To further your troubles, if one or more of the checks is returned by the bank for insufficient funds, you will have to deal with collecting additional funds from the specific tenant and, re-depositing the check and paying the bank their returned check fee.

A better policy would be to only accept one check per unit or property. Have your tenants pay the rent to one person and that person writes you a check for the total. Since it will take a few days for all their checks to clear, tenants should be reminded to collect the money in advance of the due date.

By collecting only one payment you save aggravation for both you and your tenant.

Have a clear policy on rent payment
As your primary objective in owning rental property, it is imperative that you have a clear and specific policy on collection of rent payments. This should be outlined in your lease and reviewed with your tenants. Never assume your tenant will know what to do with your rent money or you will chance getting late or incomplete payments.

•The following items should be reviewed with your tenants:

•Exactly how much is due

•What is included in the amount (such as utilities or other services)

•What period of time does the payment represent

•Who a check should be addressed to

•When rent is due

•Where the payment should be made, or how it will be collected

•The exact mailing address if payments are to be mailed

•Instructions on lost checks

•What to do if the payment can’t be made

•What the penalties are if the payment is made late, and how they will be collected

•What happens if a check is returned by your bank

Try to make things as easy for your tenants and you as possible. Make all of the payments for the same amount so there is no confusion. Give clear instructions on where a check can be mailed or dropped off. Let tenants know if cash is acceptable. Tell them when they should expect the check to be cashed by you. It is probably a good idea to hold it for a day or two, but not any longer. This will give time for any checks they deposited to clear, but not give them false indication that they have extra money in their own account.

Having a clear policy on rent payment and making the process easy for your tenants, should help you to ensure timely and complete collection of rent money.

Never make deductions from the rent
One big mistake that many landlords make is to allow deductions from the rent. For example, a repair needs to be made and you get the tenants to hire someone. Instead of paying the tenants back or paying the contractor directly, you have the tenants reduce the next rent check. This may not seem like a big deal, but it creates a situation where the tenants can dispute the amount owed to you, or open the door for them to short future checks because of repairs they decide to make without your consent. It also can cause a difficult situation if you have multiple tenants sharing a dwelling but don’t pay rent equally. Allowing a deduction from the rent will require the tenants to recalculate the amounts they each owe that may lead to disputes and even cause a delay in their payment.

It is a good idea to handle all repairs yourself and pay for any services separately, outside of the rent payment.

Make penalties effective
Always include a clause in your lease that explains the penalties if rent is paid late. The penalty should be a fine of a reasonable sum that increases the more days the tenant is late. After a certain point, you should indicate that if payment is not received, you will post an eviction notice. Check with your city on the rules for this procedure. It is very important that you discuss the penalties with your tenants so they are fully aware of the consequences of paying late. If your tenants are late, you should try to speak with them to find out when you can expect the payment and remind them of the fine they will be charged. This discussion will help you to collect rent quickly as well as the late fine. If your tenants are late, you should make sure you collect the fine or you risk loosing the leverage you created in the lease. Try to collect the extra money when they pay the rent because this will have more of an immediate impact on them then taking the money from their security deposit that they have already paid. Do not use this type of penalty as a way to collect extra revenue.

Remember, your efforts should only be aimed at collecting the rent on time every month. By making penalties meaningful and collecting them if warranted, will help you get timely rent payments.

Create a buffer between your and tenants
Money is one of the most sensitive areas of a person's life and needs to be handled with care. People work very hard for their money and sometimes have difficulty letting it go, even if they owe it to somebody else! By creating a delicate balance in your rent collection procedure, you can soften the impact to your tenants. One way to achieve this is to use a third party to collect the rent money every month. If you are the one who answers tenant questions, does repairs and reviews the lease, use someone else such as a husband, wife or relative to collect the rent. This person can make proactive calls, follow up on late payments and review late charges. If tenants are more then a day or two late, you can follow up with a more serious tone, expressing your concern about the late payment and reiterating the penalties. By using this approach, you create the image of a bigger entity that is serious about collecting their money. You also create a buffer between you and the tenants so they are less likely to air their excuses why the rent is late and just make the payment.

Using other's in your rent collection process will keep you on good terms with your tenants and help ensure timely and complete payments.

Know when late payments are likely
If you are renting to students, you will come across times when your tenants are not home, yet the rent is due. For example Christmas break, spring break and times during the summer. As a landlord trying to collect rents on time, make every effort to contact your tenants well in advance and remind them that the rent is due, even though they will not be home. Suggest they make arrangements to pay the rent early or mail it, but not to be late.

In addition, as the final month of the lease term nears, make sure you collect the rent on time. Tenants may need the money to pay their security deposit for another property if they are moving out and may not pay you. It is best to avoid using the security deposit in case their are damages to your property or unpaid bills.

Keep in mind any dates you suspect may cause a late payment and take action ahead of time.

Use legal means if necessary
It is always best to avoid the legal system for collecting rent if possible. You will have to take the time to file a judgement and to appear in court. This may require a day off of work and court fees. But don't ignore this valuable tool if it is warranted. After you have exhausted all possible means to collect the money that is owed to you from your tenants, do not hesitate to file a judgement with the local court against tenants for non-payment. They will have to appear in court and explain to the judge why they did not pay. If the tenants do not have a good reason, they will be required to pay you or you can file a lean against their current and future assets. This will prevent them from getting a loan or mortgage until the dispute is cleared.

Using legal means to collect rent is a good thing if you have trouble collecting your rent money. Make sure you check the laws in your state as each state is different on how rent can be collected and fees charged.

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