Last year I become a first time homeowner — exciting, right? At the same time, I also then started managing my first rental property. You see, while I was in the process of buying a home I decided I’d split the cost of my mortgage by also seeking out roommates. Fast forward a bit, and I have found a few people to live with. However, I have also found myself up against a common challenge many property managers — and roommates in general — have: late rent!
To solve this dilemma, I turned to a few of my financial mentors who also own rental properties. I asked them what their suggestions on things like finding good tenants and (most importantly) getting them to pay rent on time. Most of them said the best way to handle a late payer is by putting a late fee in place (e.g. $25 for each week late).
To me, though, charging a person who was obviously already struggling to pay rent was a little counter-intuitive. Instead, I started thinking about what incentives a tenant might naturally have to pay rent on time, without having to resort to an extra fine. I came up with two:
- Pay rent on time to avoid conflicts with either their property manager or roommates.
- Pay rent on time in order to maintain a good relationship with the manager for a possible lease renewal.
The problem is that many of these depend on how “good” a person is. They don’t actually put a financial incentive in front of the tenant for paying on time (or early). So I decided to impose what we will refer to as an Late Avoidance Incentive (LAI).
In the end, I decided that if my roommates paid their rent before the 1st of each month, they would receive $25 off their normal rent. For further peace of mind, I decided that all utilities (washer, dryer, internet, and cable) would be included in their flat rent price.
Since these two changes in policy have been enacted, there actually has been a small culture change in my house. Not only has incidents of late rent gone way down (read: zero), one of the people living with me has even tried to pay me several months in advance in order to save hundreds of dollars over the course of a year.
So let’s do a little cost/benefit analysis:
- I receive $25 a month less from tenets.
- I don’t receive extra compensation for late rent.
- Rarely do I have to bug tenets to pay rent.
- I usually have money to pay the mortgage payment well before it’s due.
- Roommates feel that I am looking out for their best interests.
A year into my new home ownership system and I have yet to receive a late payment from roommates. Not even by a day. That’s not to say my system is perfect, or even that I am even getting the best deal. But the money is steady. Not having to awkwardly chase people for rent money has a value too. I would recommend, however, that if you are going to cover utilities (or any bills that aren’t fixed), that you make sure you put a cap on the amount you are paying as the homeowner.
Related from WalletGenius
Retirement SavingsAre Your 401(k) Fees Too High?
Retirement SavingsShould You Hire a Retirement Advisor?
Retirement SavingsThe Best States For Seniors To Retire In
Saving MoneyHere’s How Retailers Trick You Into Spending More Money
Retirement SavingsHow To Keep Saving Money After Retirement
Investment StrategiesWhat is the ‘Rule of 72’ and How Does it Work?
Retirement SavingsMake Sure You Avoid These Costly IRA Mistakes
Retirement SavingsWhen It Makes Sense To Take Money From A Retirement Fund Early
Retirement SavingsWhat You Need To Know About Registered Retirement Income Funds
EducationStarting an RESP: Everything You Need To Know
Saving MoneySimple Steps To Becoming A Super Saver
VacationsHow to Save Money While On Vacation