By: Jay Long
Q : Dear Jay, I own several rental houses and small apartment buildings in Ohio. I feel like I’m doing pretty good except when the first of the month rolls around. I always worry about having enough of my rents collected to mail all of my mortgage payments. At least half of my tenants pay late, some two and three weeks late. I feel like a wimp having to call and ask them for the rents. Can you help? Wimpy in Ohio A: Dear Wimpy, I’ll gladly pay you next Tuesday for a hamburger today… or in this case your rent for two weeks free lodging. From what you’re telling me, you’ve got to have your act together to own and manage so many properties, so let me start by saying good job on what you’ve done so far. What you have is a financial “float” problem. Float is the time from when you collect your rents until you have to pay your mortgage payments. It sounds like your mortgage payments are due on the first and the majority of your rents aren’t collected until two weeks later. You have a “negative float.” This forces you to keep more operating capital on hand. A simple operating capital example is if you have $10,000 in mortgage payments due on the first and you collect $10,000 in rents before the first, you have an operating account that goes for $0 to $10,000 in rent deposits and back to $0 with $10,000 in mortgage payments. This is the way it works only in a perfect world where all your tenants pay on time. In the real world, tenants don’t all pay on time and we will a little extra money to make up for the shortage until we can collect all of our rents. So the short answer is you are going to have to keep a little extra money in that account to cover your negative float. The trick is to make your tenants pay faster and pay more when they pay late. That means faster court actions on your part and the charging (and collecting of) late fees. In my business the rent is due before the first and it’s late on the second. When late, there is a 10% penalty and $10 per day late charge. (Check with your local laws on how much you’re allowed to charge. It’s different in every county.) We also send eviction notices with late fees added in immediately to everyone who is late. (Technically in my state, we’re not allowed to file eviction until the tenant is seven days past due.) Then on the seventh day, we file eviction on every tenant who has not paid all of their rent and all of their late fees. Nobody slides. It doesn’t matter if they’re sick or have been good in the past. This is the company policy and this is what happens. If they don’t want to get wet, they shouldn’t stand in the rain. I know what you are thinking. If 50% of your tenants pay late, then you will be evicting 50% of your rent and you need that money to stay alive. Don’t worry, just because you file eviction for non-payment of rent does not mean you’ll evict every single one of them. What you’re doing is shocking the tenant’s priority system. You are taking your first step in training them. If they are faced with living in the street or paying you the rent, guess which one 99% will choose? What should happen when you decide to stand your ground like this is most, if not all, of the tenants will pay the rent, the late fees and the eviction fees long before you get before a judge. Also your new found backbone will have them paying on time or paying you a big chunk of late fees every month. Remember, tenants need to be trained and there is no better way than to zap them in the wallet every time they get out of line. Jay Long is an expert real estate investor and national speaker. He’s also a licensed real estate broker, author of several real estate courses, seminars and a monthly newsletter, and former vice-president of KREIA (Kentuckiana Real Estate Investors Association). If you would like more information about Jay’s courses, monthly newsletter subscriptions, or if you would like to have Jay speak to you group… contact him at: JAY LONG PO BOX 20025 LOUISVILLE, KY 40250 PHONE (502-893-3313) FAX (502-893-3384) EMAIL Jaylong7@aol.com or www.JayLongInnerCircle.com
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