Developing a plan for collecting rent payments will save you the headache and the hassle of remembering which tenants have paid, who’s rent is late and what to do if a tenant never pays.
A rent collection policy is a documented system that you and your team use to enforce late fees and lease terms. It goes beyond simply saying rent is due on the first, and includes information about acceptable ways to pay rent and what happens if rent is late, or never turned in.
Certain aspects of your policy will need to be shared with your tenants in the rental agreement. Your tenants need to know:
- What day rent is due
- What day rent is considered late (ie is there a Grace Period)
- What late fees will be issued if the full rent amount isn’t received on or before it is due
- how non-payment of rent will be handled
- how rent will be collected.
Internally your rent collection policy should also specify how rent payments will be recorded and managed once received, how non-payment of rent will be handled, and how outstanding debts will be managed.
What day is rent due?
The industry standard for rent due dates tends to be the first of the month. However, most states allow a landlord to specify any day of the month for rent to be due. I personally have had rent due on the 1st, the 5th, and the 10th, according to different lease agreements in Oregon.
The most important part of setting a rent due date is selecting a date that you stick to throughout the entirety of a rental agreement. Staying consistent will help you keep track of who has and hasn’t paid rent, and guide you towards follow-up action if needed.
What day is rent considered late?
Many rent collection policies allow for a grace period that gives residents a few extra days to pay their rent in full after the due date but before incurring late charges.
Despite an approved Grace Period, it is important to remember that rent is due on or before the due date. If paid after the due date, but before the end of the grace period, a late fee may not accrue, but the payment is still considered legally delinquent.
You should express to your tenants the importance of paying rent on or before the due date, not during the grace period.
What late fees should I charge?
Implementing a late fee policy is a good way to make sure tenants remain diligent about on-time payments throughout the course of their tenancy.
Your rental agreement needs to include what day of the month rent is due, the day a tenant will begin incurring late charges, and the amount of the late fee. It is important to include these specific terms in your rental agreement because it provides a legal contract agreed to by you and your tenant and will protect you if any disputes arise.
Late fees are usually assessed as a flat fee, a percentage of the overdue balance, or a daily fee.
The amount of a late fee can range from $5-$50, and depending on your state or local laws, you are able to choose a late fee amount and structure that best fits your business. If you choose to charge a daily late fee, you will need to cap the late fee at a reasonable amount.
How is rent collected?
Your rent collection routine should be one that results in the highest proportion of prompt payments which translate into actual cash in your bank account. To facilitate this you will need to decide what payment method you want your tenants to use and how they can deliver rental funds to you.
Types of Rental Payments
Rent is typically paid to property managers or owners via:
- Personal Checks
- E-Checks (also known as ACH electronic drafts)
- Credit or Debit card online payments
- Certified Funds (ie. certified check, cashier’s check, money order, wire transfer)
- Cash
Each payment type carries its own advantages and disadvantages, for both managers and tenants. There is no set requirement for which method you wish to implement but it is important to consider what will generate the most on-time payments from your tenants.
Some states require that landlords must accept at least 2 forms of acceptable rent payment methods. Other states allow landlords to forbid rent payment by personal check if the tenant writes a bad check.
Ways to Collect Funds
Depending on which payment type you choose to accept, you will have a couple options for how you will collect rent from your tenants.
Rent collection can include:
- Mailed in payments
- Automated online payments through e-check or online credit/debit payments
- Drop off location like a dropbox or business address
- In person rent collection
Like any decision in your rent collection policy, you need to decide which collection method will work best for you and your tenants. Consider what method will be the easiest for your tenants and which will take the least amount of your time to process.
Requiring payment by certified funds or at a remote physical location instead of by mail, for example, can make payment a hassle for your tenants. These type of payment conditions may be necessary, however, if your tenant has a history of late payments, insufficient funds, a bad credit history, etc.
Your rental agreement should state what payment types you accept and where your tenants should deliver rental funds too.
How are rent payments managed and recorded?
Creating a good system for internally managing and recording incoming rental income, as well as tracking late payments and incurred fees, will help you stay organized and diligent in your rental business.
Your rent management method should include a system that alerts you when a timely payment has not occurred, so that you can start assessing late charges right away.
This system could include notifications through a digital calendar that requires you to manually check that payments have been received or using an automated system that integrates rent collection, management and record keeping through one interface.
Automating your rent collection system is a great way to track rent payments and set up a late fee system that automatically charges tenants when they pass the grace period. Software programs specifically designed for landlords and property management provide convenient ways for users to link tenants to a property with a designated rent amount, due date, grace period, and assess late fees accordingly.
Here is an example of how you can use a simple property management software program to set up late fees for rent payments.
When should I start the eviction process?
Your rent collection procedure should also outline how and when you will start an eviction process if a tenant does not pay their rent. I
t is good practice to start the eviction process as soon as possible once your tenants have started incurring late fee charges. Remember evictions are costly, time consuming processes that could mean lost income and potential property damage from an angered tenant.
To avoid a real eviction, consider implementing a pre-eviction phase which can include issuing a Late Rent Notice to prompt them to pay this delinquent rent within a certain time period. If your tenant still does not issue rental income with the period outlined in the Late Rent Notice, you need to move forward with an eviction for non-payment.
The exact process for how you can legally proceed with an eviction is regulated by your state landlord-tenant laws, you should always consult with a lawyer before proceeding to make sure you are handling the eviction process appropriately.
Most rent collection problems do not arise because the collection policy is bad, but because it is not followed.
Anyone that self-manages their investment property should have a rent collection plan in place before they collect their first rent check.
A property management firm will need to have a similar rent collection procedure in place, with additional details in regards to trust accounting and how owner funds from rental income are managed and distributed.
If you work with a property management firm, be sure to review their rent collection procedure and ask questions specifically about late fees, how non-payment of rent will be handled, how outstanding tenant debts are handled and how rental funds are paid out to owners.
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