07. SETTING & COLLECTING RENT

7. SETTING & COLLECTING RENT

7.1. How Much Rent to Charge

Setting rent is easy. You want the maximum the market will bear.  Remember that it does NOT matter how much you NEED to pay your mortgage payment or the taxes or the insurance or anything else.  

The only thing that matters is how much the renter is willing and able to pay each month.

I’ve had owners say to me “I own my property free and clear of any debt, so I keep my rents low and always get great tenants who stay a long time.”  By that logic, you should just pay your tenants to stay with you and I’ll bet they would NEVER leave.

The best way to set your rent is to perform a market survey by putting yourself in the shoes of your prospective tenants.  Look on ZILLOW and Craigslist, look for signs, look at the bulletin board at the grocery, and visit all your competition.  Tell the landlords who meet you that you think a cousin and his family are moving to town and you want to do some homework for them in advance of their arrival.  Then set your rent based on what the market will bear for your units when compared to other available property.

The market will determine what the maximum rental rate is for your rental house.  Unfortunately, the market doesn’t care what the mortgage loan is on your rental house and the maximum rental rate may happen to be less than your monthly payment.  If that is the case, you will experience negative cash flow, where it costs you more each month to own and maintain the house than you are getting in rent.  

Your prospective resident is likely looking at a number of possible houses to rent.  So if yours is overpriced, it’s going to sit vacant. The principle of substitution says that a consumer will substitute a comparable product or service if  your price is too high.  So you need to know what your competition is doing.

Look for rental signs in your area.  Look on Craigslist and ZILLOW for rental ads from your neighborhood or part of town.  Get the address and drive by to see what the house actually looks like.  Pretend to be a prospective renter and see how hard it is to work with most amateur landlords.  Then vow never to treat residents or prospects like that.

Another way of determining what other landlords are charging in your area is to conduct a rent survey.  

First you need a list of the non-owner occupied houses in your neighborhood.  You can obtain this list by going to the county courthouse and looking up the owner’s mailing address for all the houses on your street.  Most Georgia counties, such as DeKalb, have all this information free on their website.  If the county mailing address for the tax bill is different from the property address, it’s likely that the property is rented.

Enter into a Google search:

Dekalb County Tax Commissioner Property Information

as an example. You could enter every street address in your block and find out the name and address of every absentee landlord.

An even easier way is to ask a real estate professional to get you a county tax printout on every house on your street.  

In the Atlanta metro area, most real estate agencies are members of one of two large multiple listing services.  One feature of the service offered by the listing service is access to county tax records, and it costs the agent nothing more than their time spent at the computer.

By comparing property addresses to mailing addresses, you can determine which houses near yours are owned by someone who does not live there.  You can then call the owner and tell them you are thinking about renting your house and wondered if they would mind giving you an idea of what rents run in the area.  

Amazingly, most owners are willing to talk about the subject with perfect strangers.  And who knows, you might even be a potential buyer for that landlord’s property.

Also, you can simply knock on the door and tell the resident you are conducting a rent survey and would they mind telling you what a fair rent is for the area.  By the way, if you do this, at least carry a clipboard and take notes as the resident tells you things – it looks much more oficial.  Inevitably, they will end up telling you that they are paying too much, and you can get a good idea of what their rental rate is.  

Once you know what others charge for homes in the neighborhood, you can begin testing the waters.  I always like to be a little lower than my competition, but you can start high and come down if you prefer.  I just don’t want to waste time.  

Also, I have found that many prospective residents will look at the property and then ask if I am firm on that rental rate.  I used to be willing to negotiate, but I have come to the conclusion that negotiating rent is self-defeating.  

Once you open the door to negotiating the rental rate, the resident detects a sign of weakness, and you’re in for a deluge of haggling on every little expense for the duration of the lease.  

I set a fair price and stick to it and state it clearly, up front (see sample newspaper ad and telephone message).  If I decide to come down, I wait until I have updated ZILLOW and Craigslist online to announce it.  At least that way, I get exposed to a larger number of people who might be interested at the lower price.  My experience has been that I don’t want to rent to people who try to beat me down on the rental rate.

One rule of thumb for setting rent is that I would like to get at least one percent of the fair market value of the property for each month’s rent. And if the rent is one percent of value, you can see how higher priced properties become less attractive as rentals.  For example, it is relatively easy to rent a house worth $125,000 for $1250 a month, but almost impossible to rent a house worth $375,000 for anything close to $3750.

Whatever you do, don’t fall into the trap of saying that your rent is satisfactory because it covers your monthly expenses. By that line of reasoning, if you owned a house free and clear of any debt, you should rent it for almost nothing.  The asset commands the rent, not the debt you carry on it.

My philosophy is that I want to get the highest possible rent on any property at any time, regardless of what my costs or expenses are related to the property.  Try to avoid the temptation to think only of cash flow.  It may be difficult, but there is more involved in determining the success of your real estate investment than just cash flow.  

Unless you can adopt this philosophy, you are not treating your rental property as a business, and you need to go back to the beginning of this book to decide if you have the temperament to be a landlord.

7.2. COLLECTING RENT Using CLEARNOW, Innago, TenantCloud or Zelle

In the last couple years, we have moved most of our tenants from paying their rent with checks to paying using ACH drafting with ZELLE.

Your tenant MUST have a savings account or a checking account SOMEWHERE. 

But as long as you bank at any bank that accepts payments by ZELLE, your tenant can pay you almost instantly at any time, 24/7, at no cost to them or you, and you get the money within minutes, often within seconds.  

In addition, once the money has transferred, it can not be charged back or reversed. There is no hold or waiting period. 

The only requirement on YOU is that you must have an account at a ZELLE member bank.

There are literally thousands of banks, big and small, that accept zelle.

If you are in Georgia and you need a zelle member bank account, you might want to look at the business checking options at DELTA COMMUNITY CREDIT UNION.

Take a look at all of these features:

  • Interest-bearing (tiered based on average daily balance)
  • No monthly service fee with a minimum or average balance requirement of $750
  • No charge for the first 500 combined transactions and only 20 cents for each transaction over 500
  • Free Delta Community Debit Card, but I never use Debit Cards. No protection.
  • Unlimited access to thousands of surcharge-free ATMs (please don’t commingle funds)
  • Free access to Online Banking, which includes Online Bill Pay, eStatements, eAlerts and Mobile Banking and ZELLE payments

Go to ZELLE.com for a complete list of member banks.  It is huge.

We previously used a service called CLEAR NOW.  You can find lots of info at ClearNow.com.

HERE ARE THE BASICS from the CLEAR NOW website:

Is ClearNow the best method for rent collection?

Yes. ClearNow is the easiest, most cost-effective way to collect rents from tenants. Rents are automatically withdrawn from tenant bank accounts and directly deposited into your bank account. ClearNow saves you time, eliminates headaches, and empowers tenants to pay you!

Automatically receive rent – don’t wait for checks or make trips to the bank.

Get paid on time – deposits are always three banking days after the debit day.

Collect when tenants get paid – biweekly, semimonthly, or monthly.

ClearNow has been in business since 2000, serving thousands of landlords, property managers, and their tenants:

You will receive prompt notification of who has paid.

Tenants do not need a computer to use ClearNow.

Tenants may build credit by reporting payments to the credit bureaus.

How do I convince my tenants to use ClearNow?

Tell your tenants that ClearNow is free, safe, and ultra convenient. Tenants can pay biweekly, semimonthly, or monthly. Plus, tenants do not need a computer or Internet access to use ClearNow. With ClearNow, your tenants will not forget to pay their rent, need to write a check, or pay for postage! Additionally, tenants may build credit by reporting payments to the credit bureaus.

Why is ClearNow the most trusted online rent collection service?

ClearNow has been in business since June 2000, processing rents for thousands of customers. As a testament to our service and expertise, ClearNow has a flawless (A+ ranking) record with the Better Business Bureau. We are happy to provide customer references upon request.

How much does ClearNow cost?

Each ClearNow account debits on a specific day and credits to a specific bank account. There are no set-up fees and no long-term contracts. Fees are only charged when ClearNow attempts to debit a tenant.

Monthly debit: $14.95/month for one debit. Each additional debit is just $2/month.

Biweekly or semimonthly debit: $4/debit.

Additional account for monthly debit on a different day: $7.95/month for one debit. Each additional debit is just $2/month.

The Enrollment Process:  How do my tenants and I enroll?

The enrollment process is fast and easy:

You complete your Property Manager Enrollment Agreement and submit it with a voided check.

Tenants complete their Tenant Enrollment Agreement and submit it with a voided check.

You set rent amounts and lease-end dates for your enrolled tenants.

That’s it! Once tenants are enrolled, rent collection is automatic.

What happens after my tenants and I enroll?

The following will occur automatically:

Eight days before the debit day – Tenants receive payment reminders (for those with e-mail).

Debit day – Tenant bank accounts are debited. Debit monthly, biweekly, or semimonthly.

Credit day – Three banking days after the debit day, your bank account is credited net of ClearNow fees and a payment report is e-mailed to you. The Federal Reserve Bank takes three banking days to confirm tenant funds have cleared.

Can tenants use a prepaid debit card with ClearNow?

ClearNow can debit prepaid cards that permit an ACH debit to the card account. Tenants should check with their card company to see if their account can accept an ACH debit.

How do I know which tenants paid successfully?

On your credit day, a payment report is sent to you via email. Payment reports are maintained in your ClearNow account.

What happens if tenants do not have enough funds in their bank account?

ClearNow will notify you via e-mail of tenants who failed their debit via ClearNow. Tenants will need to pay their rent directly to you in another form such as a check or money order. ClearNow will not re-attempt the debit for that particular payment. ClearNow may assess a fee to the tenant for failed payment.

How does ClearNow handle partial rent payments?

ClearNow does not collect partial rent payments. If a tenant does not have 100% of the rent amount in his/her bank account, then nothing is collected.

Can I download or export ClearNow payment data?

Yes. You can download ClearNow payment data as a CSV file. The data can be viewed with spreadsheet software, such as Microsoft Excel or Google Sheets.

Directly Depositing Owner Proceeds:

Can a property manager use ClearNow to deposit a portion of the rent collected to the owner’s bank account?

Yes. Once enrolled, a property manager can enroll owners and tenants. A manager can designate a set amount or a percentage of rent collected per tenant to be deposited in the property management company’s bank account for property management fees. The remaining amount collected will be deposited to the owner’s bank account.

Credits to the property manager and owner bank accounts occur on the same day – three banking days after the tenant’s debit day.

What is the cost to deposit funds to the owner’s bank account?

$2 per tenant in addition to ClearNow’s standard fees.

Reporting Payments To Credit Bureaus

Does ClearNow report rent collection to credit bureaus?

Yes. ClearNow reports ClearNow rent payment data to Experian RentBureau (www.experian.com/rentbureau) and PRBC (www.PRBC.com). Experian RentBureau adds on-time rental payment data from ClearNow to Experian credit reports. PRBC is a credit bureau that produces a PRBC Report and Bill Payment Score that may be used to supplement the credit reports and scores from Equifax, Experian, and TransUnion.

How does credit reporting work?

After your tenants enroll in ClearNow, they provide consent to ClearNow to have their ClearNow rent payment data reported. ClearNow reports rent payment data made while a tenant is enrolled in ClearNow.

For successful rent payments through ClearNow, nothing needs to be done. For debits that fail or are blocked, you must update your tenant’s ClearNow payment record (via your ClearNow account) before ClearNow will report that information.

ClearNow will first report data to the credit bureau after four (4) payments. Thereafter, ClearNow will report on a monthly basis.

What are the benefits of reporting to credit bureaus?

As the landlord, you may have a competitive advantage over other landlords in your area and find it easier to fill your vacancies since you will be helping tenants build their credit history. Also, to build good credit, tenants will want to be timely on their rent payments, thus creating consistent cash flow for you.

For tenants, building a good credit history is important. By having a positive history, tenants can demonstrate their fiscal responsibility and thus receive competitive rates on mortgages, loans, and other purchases.

END OF INFO FROM THE CLEARNOW WEBSITE

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Here is how I formerly collected rent the old-fashioned way, just in case you want to use it:

7.3. COLLECTING YOUR RENT – The Old-Fashioned Way (Zelle is better)

The lease (including the completed “Move-In Inspection List) must be signed before the resident moves into the property.  I prefer to get the lease signed quickly after I accept the application, so the resident is less likely to change his or her mind.  

Once the lease is signed, the check received with the application becomes the rent for the first month.  That has been paid and is not refundable.

The security deposit must be paid in full before any occupancy begins.  That includes storing belongings on the premises.  

Remember that you can’t accept a security deposit until the move-in inspection form has been signed and given to the tenant for his permanent retention.  All the forms you need and a lot more are available 24/7 at the LLSG subscribers vault.

All funds should always be in the form of checks, money orders, or electronic transfers.  I make it a point not to deal in cash, because the resident or his friends might assume that I carry a lot of cash, which I don’t, and that is not safe.  

As we discussed earlier, if a tenant wants to pay me cash, I will meet them at the corner QuikTrip, and help them buy a money order.  It’s just safer that way.  

The same holds true for rent collection.  

I never collect the rent personally.  After the resident moves in, I mail a letter from Delta Rental Services welcoming them as a new resident, and letting them know the rules:

1.  Enclosed in the package are 12 blue postage reply envelopes.  I strongly recommend you have these printed at a stationery store or a printing house.  It only costs pennies per envelope, and you’ll find your collection rate improves measurably.  

I use a company called EnvelopesDirect.com and the prices are great – about $82 for 1000 blue remittance envelopes shipped free.  Have the envelopes imprinted as DELTA RENTAL SERVICE at P. O. Box 500 in whatever town you live.  Have the printer put blank lines in the return address corner and the word FROM on the first line.  

I do not recommend using postage paid envelopes.  It costs too much, and many times the post office fails to place a postmark on the outside of a postage paid envelope, so you won’t know when it was mailed or from where.  Most people are used to paying bills by mail in pre-addressed envelopes.  

Using preprinted envelopes for your rent collection helps foster the idea in the resident that he is dealing with a big, professionally managed business.  Make sure you resist the temptation to put your name on the envelope.   And for heaven’s sake, DO NOT USE YOUR HOME ADDRESS or any street address.  If the resident ever gets the idea they can bring the rent to you, they will do so forever!

2.  Make sure the resident knows that the rent MUST BE MAILED in the blue envelope, and that the rent MUST BE RECEIVED on or before the first day of the month.  I tell them on the day they move in that if they get rushed at the end of the month, they can actually take the blue envelope to the post office where the box is located, put a stamp on it, and hand it directly to the postal employee, and ask them to place it directly in the box.  You may not believe this, but some of my residents actually do this.  There is something in the mindset of a resident that wants to take the rent somewhere.  

By using the PO Box, I can honestly say that the post office is open Monday through Friday, plus Saturday until noon.  Also, I remind them that the post office delivers mail 24 hours a day, so that they can actually take the envelope to the proper post office location, and deposit into the slot marked “CENTERVILLE ONLY.”   That mail will be delivered very quickly, even on holidays.

All of my rent is always due on the first day of the month.  In fact, the lease says by 5:00pm of the first.  I usually go by the post office late on the first, and if a resident hasn’t gotten the rent in, I take action immediately.  

I send out a form late letter (see sample late letter in forms) telling them that Delta Rental Services has failed to receive the rent, and that the full non-discounted rent is now due by the fifth.  In other words, they can still be on time, it just costs them $50 in lost discount.  

I am always amazed that some residents pay every month on the fourth or fifth.  They are rarely late, they just don’t get around to paying by the first.  I send them a late notice every first, then pocket the additional rent.  

There is another reason it’s important for you to send a late notice immediately.  There is a concept in law called a “waiver.”  The idea is that you actually “grant the resident a waiver” from those requirements if you consistently accept the rent on a late basis.  Even if you are just being a nice guy, and agree to accept the rent a few times late, the resident can later argue in a court of law that you established a pattern of late acceptance and that you now have no right to demand strict compliance with rent deadlines.

There are several ways to avoid granting a waiver.  One is to specify in the lease that no failure of the management to enforce any provision shall be deemed a waiver.  Read the WAIVER paragraph of the lease.

Another way to protect your rights is to always insist on strict compliance in writing, and document your late notices.  I keep a copy of all late notices in the file to prove they were sent. (Also, I can use those late notices to deduct fees from their security deposit at the conclusion of the lease.)

Remember that, under the KILLER LEASE, the rent isn’t technically due until the fifth day of the month.  Paying by the first and getting a discount is entirely optional.  But, nobody can pass up a “discount,” so most of your residents will pay on or before the first like clockwork.  Usually, if you haven’t received the rent on the fifth, you can be pretty sure something is wrong.  

I usually pick up the phone on the afternoon of the fifth and call.  I say that I just got a call from Delta Rental Services and they tell me that they haven’t received the rent yet, and that I am just checking in.  

If it’s a good tenant with no record of being late, I get a commitment from them as to when it will be paid in full, with late fees of course, and tell them that I will call Delta and have it set up for payment on the ninth, for example.  

I also say: “You’re going to receive an eviction notice, which is just a technicality.  As long as you pay in full on the ninth, everything will be OK.”

NEVER allow the resident to put you off until next month.  

Whatever the excuse, just say “I understand that times are hard right now, but the owner can’t make the mortgage payment if you don’t pay the rent.  If the owner can’t make the mortgage payment and the house goes into foreclosure, you’ll be put out on the street, and we’ll all lose.”  

Insist on at least half the rent by the fifteenth, and a payment plan that gets it caught up by the first of next month.

It’s just too easy to fall behind, and then it’s doubly hard to get caught up again.  Regardless of what they say, you must send them an eviction notice and “demand” the property.

7.3.1. If receiving checks, use a Post Office Box

By using the PO Box, I can honestly say that the post office is open Monday through Friday, plus Saturday until noon.  Also, I remind them that the post office delivers mail 24 hours a day, so that they can actually take the envelope to the proper post office location, and deposit into the slot marked “CENTERVILLE ONLY.”   That mail will be delivered very quickly, even on holidays.

All of my rent is always due on the first day of the month.  In fact, the lease says by 5:00pm of the first.  I usually go by the post office late on the first, and if a resident hasn’t gotten the rent in, I take action immediately.  

I send out a form late letter (see sample late letter in forms) telling them that Delta Rental Services has failed to receive the rent, and that the full non-discounted rent is now due by the fifth.  In other words, they can still be on time, it just costs them $50 in lost discount.  

I am always amazed that some residents pay every month on the fourth or fifth.  They are rarely late, they just don’t get around to paying by the first.  I send them a late notice every first, then pocket the additional rent.  

There is another reason it’s important for you to send a late notice immediately.  There is a concept in law called a “waiver.”  The idea is that you actually “grant the resident a waiver” from those requirements if you consistently accept the rent on a late basis.  Even if you are just being a nice guy, and agree to accept the rent a few times late, the resident can later argue in a court of law that you established a pattern of late acceptance and that you now have no right to demand strict compliance with rent deadlines.