Rent collection is one of the most basic functions of any landlord/tenant relationship. Your tenants are paying to operate their business functions out of the space you own, and so you expect them to pay you consistently every month. Typically, rent is due on the first day of every month. Due dates should be part of your rent collection policies. Methods of payment should be part of your rent collection policy.
If you don’t have a rent collection policy in place, you need to create one.
On-time rent collection is essential for your cash flow when you’re renting out a property. You don’t want to waste your time or resources chasing down late rent, sending letters, or following up with tenants who you expect to pay on time, in accordance with the lease agreement they signed.
Here are some of the best practices Bell Properties uses as Los Angeles property managers to master rent collection and stay ahead of your investment property finances.
Send a Friendly Reminder to Pay Rent
Reminders are rarely too invasive or irritating. When a tenant has set up an automatic payment schedule or never misses an on-time rent payment, they’ll simply ignore or disregard the automated rent reminders that arrive in their email inbox or as a text message.
A reminder can be a gentle nudge, and in some cases, it can make a big difference in getting your rent payment in on time.
In order not to make this a huge ordeal for you that takes up too much time, make it automated and seamless. Schedule emails or texts. You can even send automated voicemails to the tenants who prefer to hear your voice rather than receive a written reminder.
There are plenty of tools that make it easy for you to send out rent payment reminders without spending valuable time in your day calling tenants one at a time or sending several dozen emails. Instead, you can set up automated rent reminders simply and not think about it again until the next month.
Automated reminders can work, and so can invoicing. A lot of commercial landlords don’t think about invoicing as an option when we’re talking about rent. But, it can be effective. Send out invoices to each commercial tenant, reminding them of the upcoming payments before they are due. This will reduce the chances of late payments. It will also contribute to the documentation of your rent collection process, giving you a record of communication and correspondence between you and your tenants. All parties will have records.
Whether you work with automated and digital reminders or a system of invoicing, these are proactive ways to collect rent on time. Tenants will have an easy reminder of when rent is due and how much they owe. And, you will have more time to focus on your real estate investments and the portfolio of properties you’re growing. Rent collection software will often have something built-in that allows you to send reminders. This leads to more efficiency and a streamlined collections process.
Offer the Convenience of Online Rental Payments
Almost every possible financial transaction is done online these days. Residential tenants pay their landlords rent electronically. We buy and sell goods and services online by typing in our credit card numbers. Payment platforms like Zelle, Venmo, PayPal, and CashApp are user-friendly and secure.
However, commercial landlords and tenants have historically not been so keen to offer and accept digital payments. We can speculate as to why that is, or we can just make this important suggestion: allow your commercial tenants to pay rent online. They can wire you the money, if that’s easier. They can set up automatic transfers or withdrawals from their accounts. Or, you can set up a financial platform of some kind where they can easily go online, pay the rent on the first of the month, and not be bothered with writing checks or figuring out how to get the rent check from their accounts payable office into your accounts receivable office.
ACH transfers are easy and effortless.
Online payments make things easier for you and for your tenants because they’re easily and conveniently paying from their phone or computer, anytime, anywhere. Tenants can even opt-in for automatic online rent payments so they don’t have to worry about submitting a payment each month. Plus, electronic rent payments come with the benefit of detailed payment records.
You can also use the online rental payment system you have to encourage your tenants to set up automatic payments. Having software that allows tenants to schedule these immediate and automatic payments will mean that they will not have to remember each month to initiate payments, and the risks of late and missed rent are instantly reduced.
We’ll talk a bit more about incentives next, but offering an incentive for automatic payments is an idea that might work in your favor. A discount in rent, for example, might be appropriate when your residents agree to automatic withdrawals on the first of the month.
Consequences and Incentives Drive On-Time Payments
Your lease agreement should include your rent collection policy, which is meant to outline when rent is due, how much rent is due, how it should be paid, and most importantly, what the consequences will be if rent is paid late.
Late fees are the most common consequences, and most tenants will expect to have a late fee charged when rent isn’t paid on time.
When you charge an additional fee for late rent, you’ll motivate your tenants to pay on time. Most commercial tenants are business owners; they understand the importance of on-time payments, and they won’t want to waste their own revenue on late fees because they didn’t get the rent in on time.
There are a few things to keep in mind, though.
It’s common for landlords to provide a grace period to tenants. So, if rent is due on the first of the month, you might not consider it late until the end of the third day of the month. This gives your tenants a couple of extra days in case they need those days to pull together the rental amount or facilitate the payment of the rent. You don’t necessarily know how their own business and financial operations work, so a grace period can provide some breathing room for them and still ensure you get paid quickly and early in the month.
Late fees are normal and acceptable, but don’t make them too extreme. Generally, a late fee is between 5% and 10% of the rent that’s late. So, if your commercial rent is $5,000 a month, you could reasonably charge a late fee of between $250 and $500. If you want to be less punitive, a flat late fee of $100 or $200 could also make sense. You know your business and you know your tenants.
Be consistent, but be willing to work with tenants as well. You always want to enforce the late fee, but if paying the late fee on top of the rent that’s owed will only make it more difficult for your tenants to catch up, you may want to figure out a payment arrangement or decide how to best be sure that the rent will come in as quickly as possible.
Late fees can incentivize tenants to pay on time. But, they can also create some negative energy between you and your tenants. While most landlords implement late fees, it’s less common to think of positive reinforcement techniques that express gratitude and appreciation for consistent on-time rental payments.
There are several ways to provide positive incentives to your tenants when it comes to attracting on-time rental payments. For example, you can offer discounts on last month’s rent. Perhaps for every month that rent is paid on time, you’ll knock off $10 from the final rental payment.
Or, you can choose to offer an award for early payments. Maybe you provide $25 off the month’s rent if they pay before the due date. You can send a fruit basket or a collection of goodies after six months of on-time rental payments.
What you’re really doing with these incentives is saying thank you. You’re demonstrating that you appreciate your tenant’s commitment to the lease agreement and their obligations.
Communication is always going to be key when we’re talking about on-time rent collection. If a tenant is late, don’t be afraid to call and investigate the problem. You’ll want to know if it’s just a strange month for them with some cash flow issues or if there’s something deeper that needs to be discussed.
You don’t want your tenant to fall too deeply into arrears. If a tenant falls behind, get them on track and keep them on track. It’s often more work than you want to invest in collecting the rent that is owed to you, so consider working with a Los Angeles property manager who specializes in commercial properties.
We’d be happy to tell you more and to help you master the rent collection process. Please contact us at Bell Properties Commercial Real Estate.