Three Creative Ways to Handle Non-Paying Tenants

Updated: Mar 7

The global pandemic of 2020 has left its mark on the world in many different ways, most particularly in how many people have died due to COVID-19. The numbers are staggering, and while there is hope that the coronavirus will be tamed by the release of vaccines, many families are still feeling the pain that the disease has inflicted.

On top of health problems that still linger, the damage to the economy will likely continue to wreak havoc on many, with one of the highest unemployment rates in history. Many jobs have disappeared forever, as have many small businesses that simply couldn’t recover from restrictions and closures. Particularly hard-hit were restaurants, with some experts predicting that 40% to 60% of restaurants that closed during the pandemic will never reopen. That also means many jobs that were lost and will not come back either.

All of these factors have impacted multifamily properties, because many tenants are now unable to pay rent. Of course, not all markets are impacted by COVID-19 the same way. Because of job loss, rent collections have become an ongoing problem, and until the pandemic is tamed and the economy has had a chance to recover the problems will continue. Of course, some states are doing better than others with regard to rent collections. Rather than resorting to collections or evictions (there are still many states with moratoriums on evictions), property owners and sponsors are using creative ways to deal with non-paying tenants. I’ll share the three main approaches that we’re using to handle rent collections from non-paying tenants.

Creative Approach #1: Offer Payment Plans

In an ideal situation, you would expect to collect 100% of the rent amount that’s due on the 1st of every month. However, the pandemic has changed the “ideal situation” to a new normal, where many tenants find they simply can’t pay rent because they’ve had hours cut or lost their jobs and don’t have the money. There are also many things an owner can do to help mitigate the impact of COVID-19 on a multifamily property.

Rather than turn them over to a collection agency or begin eviction proceedings we offer tenants a payment plan. We ask tenants to pay 50% or 70% when their rent is due, and the rest is forgiven. The rationale is that getting some money from tenants is better than not getting any money at all.

Another problem is trying to collect rent from a tenant after they’ve moved out. Of course, you hopefully have their security deposit, which at a minimum would cover one month’s rent. However, after a tenant has moved out the burden of proof is on the landlord. If you have a rental agreement, then the process would be easier, as they are crucial to your claim. Yet the burden of proof is on the landlord to prove when the tenant left the unit, how much they still owe, and when they actually violated their agreement.

All rental agreements should specify what happens if a tenant moves out and doesn’t pay rent, including how much notice they most provide, how they must pay their rent, and what would happen if they don’t pay. It should be a written agreement that is signed by both parties. An oral agreement is much more difficult to prove and to enforce. Having a written agreement will bolster your case and make it easier if the case ends up in court.

Creative Approach #2: Pay Tenants to Leave

I often receive a lot of surprise when I mention to colleagues that we offer to pay non-paying tenants to leave their apartment. However, paying them to leave their unit is purely an economic decision. If a tenant is renting an apartment from you for $1,000 per month as an example, and you pay for their moving costs to leave the unit and that cost is $500, you’re ahead of the game. Every month that a tenant stays and doesn’t pay rent is eating into your bottom line. The other issue is that with new tenants you may have an opportunity to raise the rent from its current level.