You bought a rental property to generate income. So when the rent doesn't show up on the first of the month, the whole point of owning the thing starts to unravel pretty fast.
Rent can sometimes be late due to unexpected events; however, when rent is not received on time consistently, then late rent becomes a problem that can lead to stress for landlords. Because many landlords, especially self-managed properties, lack systems which allow on-time payment to be the standard and therefore operate based on a policy of goodwill; send reminders to themselves; and even text late tenants occasionally, are frustrated with the process of late rent payments as well.
This post aims to teach all of the ways that property managers and self-managing rental property owners can consistently collect late rent from your tenants before it becomes late. We will go over the fundamentals of establishing and enforcing the lease agreement. In particular, all Arizona landlords with residential rental properties must know how to establish late fees as well as what are the biggest mistakes self-managing rental property owners in make from the very beginning to collect timely late rent payments and evict any delinquent tenants when necessary from their rental properties.
In This Guide
- A) The Lease - The Fundamentals for Rental Property Collections
- Automate the Reminders Before the Problem Starts
- Accept Payments Through a Documented System
- Determine Appropriate Security Deposits to Ensure You Have Sufficient Financial Protection
- Late Payments and Eviction: Don't Mistake "Nice" for "Smart"
- Handle Section 8 and HOA Properties Differently
- Issue the 5-Day Notice Correctly, and Fast
- Why a Maintenance Reserve Protects Your Rent Collection
- When a Professional Team Changes Everything
A) The Lease - The Fundamentals for Rental Property Collections
Everything starts here. If your lease doesn't have a clearly written late fee clause then you have almost no enforcement leverage in Arizona. Under A.R.S. Title 33, Arizona's residential landlord-tenant act, landlords can charge late fees, but they must be specified in the lease to be enforceable. We've seen owners skip this step or write something vague like "late fees may apply", and then struggle to collect anything when a tenant challenges it. If it's not spelled out, don't count on it.
Under A.R.S. Title 33, Arizona's residential landlord-tenant act, late fees can be charged to a tenant. However, these late fees must be specified in the lease to be enforceable. If a landlord fails to put late fees in the lease, it will be very difficult to collect late fees from a tenant. Often, a landlord will write a lease and fail to include late fees. Many times, a landlord will write a lease and state that late fees "may" be charged. The problem with this is that late fees are not automatically allowed and must be specified in the lease. A.R.S. 33-1368 allows for late fees to be charged to a tenant, but these late fees must be specified in advance in the written terms of the lease.
While making late payment possible for a short time can be considered, the lease should also state what happens after the late period and how additional late charges will be applied. This information should be very clear and detailed in order to protect the landlord's interests and to prevent any disputes with tenants in the future. When an eviction case is filed with a Maricopa County Justice Court, the information in the lease is very important as it outlines the steps the landlord must take in order to complete the eviction process. If any part of the lease is missing or left out, the case can be delayed while the information is sought. Many landlords have found that this delay can cost them 3 to 5 weeks and $1,500 to $2,500 in lost rent.
Write your lease like it is going to be read in court – because it will.
Automate the Reminders Before the Problem Starts
Late rent for the most part is not intended and is usually caused by the tenant simply forgetting the due date for their payment for the month. We are all busy and at times we put things off until the next day and the next thing you know it is the third of the month and two weeks have passed since the first and you realize that you are two weeks late on your payments for the month.
We use AppFolio for all of our managed properties, and automated rent reminders go out before the due date, not after. On a portfolio of 83 properties across Maricopa County, that small feature meaningfully reduces "I forgot" late payments. It also removes the landlord from the awkward position of being the one who has to nag.
We work with one landlord in Mesa that has a renter who has not made a payment on time in the last month or so. A formal late rent notice is issued to the tenant on behalf of this owner. The automated late rent notices are set up within AppFolio to notify the owner and renter of late payment every month, before the payment is actually late. In this case, the payment was due on the 3rd and the renter hadn't made a payment by the 5th. The late notice was sent on the 5th. The owner didn't have to send a late rent notice, as this process was handled for him. Then, the renter went ahead and made a payment to cover the past due rent for the month by the 10th of the following month. This tenant never paid on time but did end up paying all of the owed rent in full with in the time allotted by AZ state statute.
In both situations, however, the system can solve the problem for you before it happens and saves you a great deal of time and stress in the end.
Accept Payments Through a Documented System
Where does all this go wrong for so many self-managing owners of rental properties?
We have had an owner have a problem because he collected rent by Venmo and there were no documentation of payments, no written evidence of what had been paid and when. The owner could not get an eviction case started in Maricopa County Justice Court until after about 3-5 weeks after late rent had become delinquent because of loss of about $1,500 to $2,500 in late rent. The worst part is that owner felt that he had been taken by his tenant.
Accept Payment Through a Documented System. Online ACH payments through a portal, direct bank transfers with clear transaction records or any other type of documented payment system is the best way to collect rent. Cash-in-hand, Venmo, Zelle or personal checks handed over at the door with no receipt system in place is sure to create huge problems for self-managing owners in Mesa, Arizona. Tenants pay through the AppFolio portal. Every transaction is timestamped, categorized and stored. If we ever need it, it's there.
Tenants for managed properties pay via the AppFolio portal and each payment is recorded as to date, type (e.g. "rent") and then stored in AppFolio for record-keeping.
Determine Appropriate Security Deposits to Ensure You Have Sufficient Financial Protection
The owner of an investment property in a managed property should set Security Deposits based on the Risk of the potential tenant for the property. Typically, a strong tenant (strong credit, strong income, good rental history) should only pay one month's rent in security deposit and a tenant with more risk should pay 1.5 months in security deposit. For example: An owner has a rental property managed for him in the East Valley (Arizona) for $1,800 per month. Strong tenants would pay $1,800 in security deposit and tenants with more risk would pay $2,700 in security deposit. That extra $450 in security deposit for a strong tenant could be the difference of having to absorb 2-3 months of late rent by a less-than-desirable tenant before evicting them and then having to pay $2,000-$3,000 or more in legal costs to evict that tenant.
A $900 difference for a 1 month deposit as opposed to a 1.5 month deposit on an $1800 per month rental unit. That $900 could be the difference in a timely eviction process versus being tied up in a lengthy eviction process as a tenant is 8 months into a 12 month lease and is behind in his or her rental payments for several months. In this case, the additional 6% security deposit can act as a financial safety net.
Deposits don't prevent late payments. But they do change the math when things go sideways.
Late Payments and Eviction: Don't Mistake "Nice" for "Smart"
Many landlords would consider being consistent in their late payment collection to be unfair. However, enforcing late charges on a consistent basis will actually be better for your tenant(s) in the long run.
Letting one late month go by without consequence to the tenant can create the impression to them that the late charge is flexible. As time goes on, this can create more instances of lateness, and in the end result in higher charges and even eviction. This is far more costly and stressful to the tenant than the late fee could have ever been.
Consistent is better than nice when enforcing late payments. The owner of this property had a simple and straight forward rent collection process. He held all tenants to the same late payment terms and charged the late fees every time. He didn't consider waiving late fees for occasional late payments by good tenants and his tenants knew exactly what was expected of them regarding timely payments. Automated rent due and late payment reminders and all past due notices were all documentated and remained in the tenant's AppFolio file.
Also, when a tenant rings up for a couple of days prior to the late charge to ask for an extension – yes even for a couple of days – it is almost certainly to try to get you to agree to spend their as-yet-unpaid rent for the month prior to it being late. One such occasion is tolerable, but then becomes a red flag and can indicate other problems with a tenant, especially if it is a consistent occurrence by the end of 3 months or so.
“Many landlords have found that this delay can cost them 3 to 5 weeks and $1,500 to $2,500 in lost rent.”
Handle Section 8 and HOA Properties Differently
All rent collection is not created equal. We also service Section 8/HUD rental properties located throughout Maricopa County. For these programs the owner receives a monthly Housing Assistance Payment (HAP) directly from the housing authority (such as HAHAA). Most of the time this payment will arrive on time. However, there are instances where a payment will be late. And it is just as easy for a Section 8 tenant to stop paying their portion of the rent as it is for any other renter. We can track both the HAP payments as well as the portion paid by the tenant in our on-line software package, AppFolio.
At any given time we have track of HAPs due to come in for the current month as well as any part of the rent that is the tenants responsibility. An owner with a multi-family property in the East Valley was thrilled to find out that even though a tenants housing voucher was taken away in the first part of the month that he was only a single month behind on his rent payments. This was found in our records and notified to the owner shortly after the 1st of the month for the current month, thus sparing the owner a couple of months of confusion as to why the tenant was not up to date on his payments.
HOA issues can create another layer of problems for Landlords. Many of our apartment management clients have single family home rental properties in HOA communities in cities such as Gilbert, Chandler, and Glendale. When a tenant fails to pay rent, the tenant's actions can cause problems for the owner as well. Typically, a homeowner in an HOA community is responsible for paying HOA dues on a regular basis, such as every month. If the owner fails to pay HOA dues for any reason, including that the tenant has failed to pay rent, the HOA can begin to assess late fees on the owner's account. These late fees can quickly add up to hundreds or even thousands of dollars and become a problem that the owner must deal with in addition to collecting any past due rent from the tenant. This is why it is so important for the owner to make sure that he or she is paying all HOA dues on time, even when there is a delinquent tenant in the home.
Issue the 5-Day Notice Correctly, and Fast
The 5-Day Notice: Don't Jeopardize Additional Time in Eviction!
It is vital to send the 5 day notice correctly to avoid having to wait extra time for an eviction to commence. Simply sending a letter to the tenant stating that they are delinquent in their rent payments does not comply with Arizona Statutes governing eviction proceedings. In order to initiate the eviction process in Arizona a 5 day notice to pay or quit must be sent to the tenant and all documentation regarding the tenancy must be kept in the tenant's file. All correspondence to the tenant must be documented as well. Even one piece of missing information could cause an eviction to stall.
We keep the necessary documentation up-to-date on each property so that if a 5-Day Notice to Pay Rent or Quit is required at any time it can be sent out immediately and is complete.
Why a Maintenance Reserve Protects Your Rent Collection
You'll be surprised to learn that a maintenance reserve has much to do with your receiving rental income in a timely manner.
Yes. An owner who transferred to a new management company recently discovered that there was no maintenance reserve being held for his rental property. As a result, a repair request had been waiting to be addressed for 11 days. The tenant had even begun to withhold partial payment of his rent as he felt the property was not being maintained in a habitable condition. Had a maintenance reserve been being held, the management company would have been able to contact trade partners for HVAC repair or plumbing repair within 24 hours to effect necessary repairs. Habitability issues are typically used by tenants as leverage to stop payment of rent until repair can be made. By having a reserve held, the issue can be addressed before it becomes a habitability issue. $300 per property is all that is required to be held in reserve for repair. This reserve can be drawn down as repair requests are received and repaid as rents are collected.
We require a Maintenance Reserve of $300 on all properties we manage. This means that when repair work is ordered, we can contact our trade partners for HVAC work or work involving water to have repairs done in a timely manner. Typically, a service call would be completed within 24 hours.
Unresolved maintenance is one of the biggest reasons why tenants withhold rent. So being able to respond to a repair notice within 24 hours of receiving it is a huge way to protect the rent that you're receiving and prevent tenants from claiming that the property is not habitable because of certain repairs that need to be done.
When a Professional Team Changes Everything
Just because something is informal does not mean it will cost you nothing. Often times owners find out the hard way after having been self-managing that there were hidden costs to informally managing their rental properties. If you are paying late fees in the form of Venmo transactions that have not been documented in a formal paper trail, or if you have a soft late fee clause in your lease that has not been effectively communicated to your tenants, or if maintenance requests are allowed to sit for 2 weeks because there is no formal vendor relationship in place, then you are finding out the hard way that informally managing your rental properties can cost you a lot of money in the moment you begin to formalize your rental properties management.
We have 25 years of experience in managing rental properties in the Phoenix Market. Our current Vacancy Rate for the 83 properties that we manage is 5.0%, or approximately 4 properties that are currently vacant.
If you are finding that collecting all of the rent due on your properties is becoming harder than it should, then maybe we can help you too. Learn more about our Guarantees or review our Pricing to see what professional management looks like.
FAQ
Late Rent? Is There A Secret That Property Management Companies Use To Make Tenants Pay All Of The Rent On Time?
Late payments are handled through automated notices that go out prior to the due date. A clearly written late fee clause is included in every lease and one formal notice is issued for every late payment made by a tenant. All correspondence regarding late rent payments are formal in nature and are kept in a documentation trail should an eviction filing become necessary.
What payment methods does ProEx accept for rent?
All rent payments are made online via the tenants AppFolio portal using ACH or other similar online payment methods. We do not allow cash payments or any type of P2P payments. We have found that having a clean and detailed payment history is very important in the event that a eviction filing in Maricopa County is required.
How is the security deposit amount determined?
The security deposit on each of our properties is 1 month's rent (unless the applicant has very poor credit in which case we require 1 1/2 months) with the intention that at the end of the tenancy the entire deposit will be returned to the applicant minus any necessary repairs (determined by a physical inspection of the property at the end of the lease, comparing notes to the initial inspection).
What happens if a tenant simply stops paying rent?
In Arizona, a landlord has 5 days to issue a 5 day notice to pay or quit on past due rent. There are very specific rules that must be followed. ProEx does these notices correctly and immediately. This gives us a strong position in any case that may end up in a Maricopa County Justice Court Eviction Proceeding.
Does ProEx manage Section 8 properties?
We can manage Section 8/HUD rental properties also throughout Maricopa County. All payment, the Housing Assistance Payment from the housing authority and the tenant's portion are tracked in AppFolio so if there is a change in either payment you will find out about it immediately as opposed to months later.
Are there any extra fees that Tenants pay directly to administer their rental property so the owner doesn't have to absorb the extra costs?
There is an initial one time admin fee of $195 at move in time and a monthly admin fee equal to 1% of the gross rent that the tenant pays every month. For example a $1,800 per month house would be $18 per month for the admin fee.