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While late rent payments are very typical in many rentals, it is how you respond to them that will ultimately determine your success as a landlord. Being reactive can severely drain your cash flow, and it also puts you at risk of damaging your relationship with your tenants.
This guide will outline a proactive strategy to deal with late rent payments by defining the obligations of your tenants, explaining the impact if unpaid rent is turned over to collection agencies, and providing practical ways to avoid late payments.
Understanding Tenant Payment Responsibilities
The first step to preventing late rent payments is to state clearly within the lease, outlining everyone’s financial obligations and potential penalties when these aren’t respected.
The Lease is Your Most Important Tool
Your rental lease is a legally binding contract detailing everything, from preferred communication methods to HVAC maintenance schedules. Regardless, the lease’s payment terms are the most important part of that contract.
You need to clearly and simply state the following in your lease:
- The Monthly Rent Amount: The specific dollar and cents amount of your monthly rent.
- The Due Date: The specific date of the month by which your rent must be paid (for example, the first of the month).
- Grace Period: If you are giving yourself a grace period for paying rent, you must clearly state what that grace period is (for example, rent will be considered late on the third day of the month).
- Payment Options: How do you accept payment from your tenants? Where can they deliver their payments?
- Late Fees: The amount of money you charge as a late fee must be reasonable. Your lease must specifically state either the amount of the late fee or the method used to calculate that late fee (for example, $50 per day late or five percent of the monthly rent), and when that late fee will be charged (for example, on the sixth day past the due date).
Note: Massachusetts Law requires that all late fees be reasonable; however, there is no law requiring landlords to provide a grace period for late rent.
Consequences Must Be Clear
Tenants need to be informed of the potential outcome of not paying rent. The timeline of the potential ramifications of not paying rent will vary depending on your specific lease agreement, but generally includes late payment fees, court costs (if you choose to file an eviction), and negative marks on your credit report.
Additionally, it may be beneficial for tenants to understand the long-term implications of unpaid rent going into collections. Understanding how collections affect a tenant’s ability to rent in the future will likely prompt tenants to consider alternative options sooner rather than later.
What Happens When Unpaid Rent Goes to Collections
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When rent goes unpaid for a long time, one method to retrieve the funds is through collections. However, what happens to both parties during this process?
The Collections Process
During the collection process, the landlord hires a collection company and pays them a percentage of what they collect. The collection company will continue to call you via phone, send emails, and mail you letters until you make good on the money that was owed (and they charge you some additional money).
If the tenant doesn’t pay, they will notify the credit bureaus that you owe them money, after sending you a letter with at least a 30-day notification. Lastly, after failing to collect from you, the collection company may file a lawsuit against you to obtain a judgment, garnish your wages, or place a lien.
Consequences for the Tenant
The consequences of this are serious for the tenant as they result in:
- Lower Credit Score: The credit score of the tenant could be severely damaged as a result of the collection, which makes it very difficult to obtain an acceptable loan rate and/or get approved for a credit card.
- Difficult to Obtain Rental: Most landlords do a credit check before renting an apartment. A collection account for unpaid rent is a huge negative indicator; therefore, it would likely be very difficult for the tenant to find another rental property.
- Financially More Burdensome: In addition to owing the initial amount of the rent plus all applicable late charges, attorney’s fees, etc., the tenant will also be required to pay any additional fees that may be assessed by the collections company.
- Legal Stress & Concerns: Collections and possible lawsuits create significant stress and concerns for the tenant.
Understanding what happens when unpaid rent goes to collections can help tenants explore alternatives before the debt escalates. This shows why clear communication about late payment is necessary to prevent such drastic repercussions.
Strategies to Prevent Late or Missed Payments
The better option is to prevent late rent rather than chasing your money from financially unstable tenants. This gives you peace of mind while keeping your property profitable.
Create a Crystal-Clear Lease Agreement
Your lease agreement needs to specify exactly when a tenant’s rent is due, how tenants can make payments (e.g., cash, check, electronic funds transfer), the length of time they will have a “grace period” if they do not pay their rent on time, and what fees are charged for paying rent late.
Use a User-Friendly Digital Payment System
Allow tenants to use an online portal where they can enter their own information to automatically make their monthly rental payment using a debit/credit card. There will no longer be a need to mail checks, and there will be immediate verification of the tenant’s payment being made.
Automatic notifications will also be sent to the tenant before the due date (notifying them that their rent is coming up) to help remind them of this upcoming obligation, instead of sending a confrontational notice directly to the tenant.
Communicate Effectively
Do not wait until after the due date has passed. Give your client a chance to respond by sending polite payment reminders a couple of days prior to the due date.
If the client’s payment is late, immediately contact the client (and document the call), so that you may communicate with each other about the potential reason for the late payment.
In most cases, a simple phone call will expose a short-term problem, and both parties can quickly find a resolution or set up a one-time payment plan before the problem escalates.
Enforce Policies Fairly and Consistently
You have to apply the same late payment policy for all tenants at all times, never making an exception. If you don’t do this, you’ll be enforcing your policies in a non-consistent way, which will cause some tenants to believe they are being discriminated against.
To maintain legal and moral uprightness, many landlords partner with property managers. Experienced Atlanta property managers help landlords maintain rental properties efficiently while maximizing returns. They also handle crucial aspects, from legal to relations.
Conclusion
Implementing an effective process to manage late rents is based on proactively managing your process (not reacting).
Setting expectations clearly in your lease agreement, providing tenants with multiple, convenient ways to make their rent online, and ensuring consistent application of your policy to all tenants will help establish a system to encourage timely rent payments.
The result will be fewer disputes about non-payment, protection of your income flow, and a positive and stable tenancy base. This will positively affect your long-term success as a landlord and significantly reduce your monthly worries.
