A common challenge for many property owners is getting rents collected in a timely and efficient manner. One program used successfully by landlords is to incentivize their residents to pay their rent on time. This is done by offering them a discount, a rebate or an annual free month. Of course the rent charged needs to be high enough to make this program possible for the owner without reducing net revenues over the rental term. As I’m sure you know, discounts can be offered without reducing the expected revenue of the property. Here’s how.
Through years of experience, many landlords have found that if they charge a maximum market rent, or even a little higher, but they include a “pay on time” discount, they have an easier time collecting the rent. The system is simple. When a lease or rental agreement is signed, the resident agrees, for our example, to pay $750 per month, when comparable rents are in the $700 to $710 range. However, if the resident pays their rent by the 5th, then the resident pays only $700. It is not uncommon for the resident knows that the agreed upon rent is high, but they are sure they can pay on time so it doesn’t matter. The discount is substantial enough that it is important to get the rent in as scheduled, thus reducing the landlord’s collections headaches. If the landlord notifies the resident that they received a discount via a monthly statement or as a notation on next month’s rent bill, they recognize it as a real benefit and as further incentive to pay on time.
This structure also adds an additional penalty for late payments. If the resident did not pay on time, not only do they not receive the discount and must pay the entire agreed-upon amount, they will also have an additional late fee. The fear of having perhaps a late fee of 10%, or $75 in our example, in addition to the lost $50 discount means that the resident has an additional cost of $125 every month they are late. This is a huge incentive to pay on time. Sometimes this extra amount is hard to collect, but it can be withheld from the deposit when the resident moves out or used as leverage for more timely future payments or even as damages (which are often trebled) in the event of eviction and collected through garnishments down line.
Like every technique in management, this discount program can make a real difference (for good or bad) depending on how it is used. If your property can justify a maximum rent, great, charge it. If you want to be more price competitive in order to rent your property faster, then you may just want to start with a lower monthly rent amount and have a traditional late penalty. The choice of course is yours as the property owner. Good luck, and let us know how we can help.