As the U.S. homeownership rate remains near record lows, more residential homes and condos are being converted into rental properties. No matter how exciting real estate investing is and what opportunities are on the market, net results often come down to effective rent collection practices.
As of 2016, 37% of homes (registration required) were being purchased by people and entities that didn’t plan to live in them. Thanks in part to all of the property-focused reality TV shows out there, interest in real estate investing only seems to be growing. When you factor in the growing percentage of buyers interested in renting out parts of their properties as vacation rentals or moving up and turning properties into full-time rentals, the number of landlords in the U.S. could soon be far higher.
One estimate says that 2,654 new renters enter the market each day. This may sound like great news for landlords, but it still all comes down to collecting the rent. So, what best practices in rent collection can investors apply to ensure their investments are safer and more profitable?
Know Your Landlord-Tenant Laws
It is vital to know your local landlord-tenant laws. For example, are you obligated to accept partial rental payments from tenants? What are the legal consequences if you choose to? What are the minimum levels of service and safety you must provide, regardless of whether the tenant is paying their rent or not? Are there any local rent control limitations? Are any new rent control regulations pending a vote? Are short-term rentals like Airbnb banned in your area? Is a permit required by the city, county or association to lease your unit? Failure to be on top of this can be very costly for landlords.
Keep Great Records
Record keeping must be flawless. It has a direct impact on taxes due, ability to refinance the property, asset value and the ability to resell. Without these records, future buyers may not be able to obtain attractive financing on the property, severely limiting the appraised value by potential creditors. Or, it can leave investors open to IRS audits and malicious lawsuits from renters.
Provide More Ways To Pay The Rent
Technology and lifestyle trends have dramatically altered the way people pay their rent. Beyond the typical counterfeit and theft risks of accepting cash, USA.gov also warns of taking checks and even cashier’s checks in some instances. This is especially true when signing a new lease.
Today, online payments can help dramatically reduce the threat of fraud. It is far easier for both tenants and landlords — and for bookkeeping purposes, too. Providing more ways to pay also helps eliminate any excuses for not paying the rent or for paying late. Online payment options can also enable tenants to use credit cards if needed, avoid extra fees and get help from family or friends.
In some markets, the rent may also be paid by frequent travelers, parents of students who live out of the country or tourists coming from abroad. Online payment is a must have. Be sure to use trusted payment platforms and currencies too. Some may even accept Bitcoin.
Pro Tip: Make sure your payment website isn’t geo-blocking countries your customers may be paying from. If they are abroad traveling for several months (which is quite common today) they may not be able to pay the rent, even if they want to.
Learn To Love The Late Payers
Some landlords are terrified of, and extremely frustrated by, late payers. The experienced know that this can actually be a great stream of extra income and elevated net profits. If renters start running 60 or 90 days late, it can be a serious issue — in fact, that usually ends up in it being cheaper for the tenant if they stretch it out and leave you hanging. Religious late payers who are always 15 days late can be a totally different dynamic. They always pay, but they always pay late. If leases are well written, this can generate an extra $50, $100 or even more per unit each and every month.
Don’t Sleep On Your Rights
Harvard University’s Joint Center for Housing Studies forecasts that the number of severely cost-burdened renters — those who are paying over 50% of their monthly income in rent — in America is only going to climb through 2025. This portion of renters may already exceed half of the population in some major cities.
Landlords can no longer lean on outdated rules of thumb for qualifying renters. It just isn’t realistic to attract tenants swiftly if you are demanding proof they earn three or four times the rent each month. This increases the likelihood of more late-paying tenants. However, just because you may choose to cut some good people some slack when they need it, does not mean it is smart to slack on protecting your legal rights. Always deliver timely late and eviction notices. That ensures you don’t lose time should you need to go all the way.
Don’t DIY It
Real estate investing can be highly profitable. At some point in life, you may have to hustle hard to upgrade your finances and change the dynamics of your income and expenses. Yet, self-managing rental properties can also be a trap. If you have to start that way, at least build in enough cushion to hire a professional property manager as soon as possible. This can be crucial for providing legal protection from malicious and frivolous lawsuits and for staying physically safe. It is also vital for being able to enjoy the monetary and time rewards real estate investing has to offer. If even part of the reason you are getting into the rental property business is to be able to get out on more dates or to spend more quality time with your kids while you still can, you can’t afford not to have a third-party property manager handling things for you.
