Three Creative Ways to Handle Non-Paying Tenants
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.
We offer gift cards to cover moving costs, and at times also offer to forgive their back rent if they agree to move out in a timely manner. Most tenants appreciate and accept this offer, because a collection or a claim of non-payment of rent against a tenant will remain on their credit report for 7 years, which could prevent the tenant from having the ability to rent a new apartment down the road.
Many multifamily property owners use the “cash for keys” approach, which is a cash incentive to tenants to move out before their lease is up. This could be for a variety of reasons, but non-payment of rent is one of the top ones. As a property owner, you may have connections with other properties where rents are much lower than your own, and you could provide referrals to those other units as an incentive to get the tenant to move.
Other incentives might include providing moving trucks, packing supplies, and other helpful items that would make their move easier. The key is to communicate with your tenants early and often, and to find ways to make their move-out easier. The sooner you can have a non-paying tenant move out, the sooner you can have a paying tenant move in.
Creative Approach #3: Incentivize Tenants to Pay Early
Most tenants are diligent about paying their rent by the 1st of each month, as they understand the benefits of being viewed as a valued tenant. While most multifamily property owners would be happy with tenants who paid by the 1st, we’ve found some unique ways to have tenants pay early. The key is to offer some type of incentive that motivates a tenant to want to pay ahead of schedule.
There are many different ways you can incentivize a tenant to do this, from offering gift cards and discounts to raffles that provide prizes. In one example, we offered a $50 “early bird” discount per month, which motivated some tenants to pay their rent in advance for 3 full months.
This is particularly important if the tenant happened to lose their job after they had prepaid their rent, because we didn’t have to reimburse the tenant, nor did we have to worry about collecting rents from those who had no longer had an income. Hopefully they are able to acquire another job during the time their rent was prepaid and they are able to continue living in the unit.
When considering what incentives to offer, it helps to remember why tenants choose to live in a certain place over another. It comes down to four key factors: location, the condition of the apartment, price, and the relationship with the property owner or manager. All are important, but people are often willing to live anywhere if the price is low enough.
That brings up other incentives that you could offer tenants to pay their rent early. For example, you could offer a refund of their security deposit if they pay rent early for a certain number of months in a row. Another option would be to offer a free month’s rent if they pay early for 11 months in a row. All of these incentives are related to price and would be reserved for the best tenants. Just be sure to have a signed agreement and be sure that it’s adhered to if they are to receive the incentive for paying their rent early.
Unfortunately, the global pandemic has changed just about everything, and that includes getting tenants to pay their rent in a timely manner. The last thing you want is to have a non-paying tenant living in one of your units or trying to chase down a tenant who has left without paying what they owe.
We use several creative approaches to deal with non-paying tenants that have worked for our properties. The first approach is to offer tenants a payment plan. This might include a discount on their rent, only asking for 50% or 70% of the amount due and forgiving the balance. The rationale behind this is that collecting some money from a non-paying tenant is better than receiving no money at all.
Another creative approach we use is to pay tenants to leave their apartment. This is an economic decision, but if the numbers work for you it’s a viable one. If a tenant is living in a unit that would rent for $1,000 and they’re not paying rent, you’re losing $1,000 cash flow per month. Offering to pay their moving costs, for example, that would cost you about $500 - $600, is an excellent way to free up the unit for a full-paying tenant. This “cash for keys” approach is being widely embraced around the country as more and more people are unable to pay rent due to a loss of employment.
Finally, we offer tenants incentives to pay their rent early. Doing this helps your cash flow, and ensures you have rents collected for the current month. This might include an “early bird” discount of $50, or gift cards or discounts to local venues, as well as offering a reduced security deposit or a free month’s rent if the tenant pays early 11 months in a row. Be creative, and you’ll find unique ways to handle your non-paying tenants.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that focuses on the "APS" of real estate: Asset, Process, and Strategy. Each episode discusses how investors can scale their real estate portfolio and/or businesses.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.