I am going to share how I deal with tenants who refuse to pay their portion of repairs. If you are a landlord long enough, you will encounter tenants who do not want to pay for repairs. It can be a stressful time. We alleviate the stress because we have a system to follow when the tenant refuses to pay for repairs.
The Repairs are Completed
One night our tenant called regarding a plumbing issue. They said the toilet was backing up and they could not get it to flush properly. The next morning we called our plumber and informed the tenant when he would arrive. Our property manager was there to let the plumber into the house. The toilet backed up because it was clogged with an abundance of toilet tissue. Nothing in the piping was defective. According to our lease in this situation, the tenant is responsible for the first $50 of the service call. We informed the tenant of the $50 responsibility. He said He understood was would pay his portion later that week when his rent was due.
The Tenant Refuses to Pay Repairs
The rent came but no late fee included. We reached out to the tenant. In the meantime he had decided he ‘disagreed’ with our assessment and decided he was refusing to pay the repair. We informed him of his responsibility. We followed our lease. We deducted the fee from the rents paid, and sent the tenant a Notice of Late Payment. We told him the $50 was due on the next rental payment. In the notice, we quoted the section of the lease applicable to this situation. The next month came and no payment of the $50. We contacted the tenant who vigorously informed us of his refusal to pay the repairs.
The Escalation and Resolution
We sent another Notice of Late Pay and we reported to the credit agency notice of late/short pay. The next month’s rent payment came with no additional money to cover the fee. We followed our process and sent the tenant a Three Day Notice to Vacate, citing the appropriate section of the lease. Upon receiving the Notice to Vacate, the tenant agreed to pay the money.
If we were to do this again, we would send the Notice to Vacate earlier in the process. There was no need to drag the process out. Our outcome was successful because we followed our defined process.
Our lease clearly defines the financial responsibilities of all parties with respect to repairs.
We go over the lease with our tenants to ensure they understand it.
We sent our standard Notices of Late Payment citing the lease and we reported the late payment to the credit bureau.
When the tenant did not respond, we sent our standard Notice to Vacate
To be successful as a Landlord, you need the right tools and the right processes.
We use our proven leases and letters and follow a standard process. We know every tenant is treated fairly because we use the same process for each tenant. Don’t be confused what to do when your tenant refuses to pay repairs.
Late rent payment can put you in a financial bind. The best solution is to have a plan before the situation happens. We have a three step process for dealing with late rent payments. It centers on our lease and execution of it. Rental property is our business and we treat it as such. Here is how you can deal with late rent payments.
Step 1- Make your tenant aware of the process
Our lease is very specific on when and where rent is due. It spells out when and the amounts of late charges. The first late charge of $100 is assessed 4 days after the rent is due. An additional late charge $25 is assessed each day at 11:59 p.m. That gives the tenant all day to get the payment to us. We go over our process when the lease is signed.
Step 2 – Send a notification of late charges
When we have a late rent payment, we send the tenant an e-mail notice of the delinquency. The e-mail is sent the next morning after the due date. We quote the section of the lease pertaining to late fees to remind the tenant of the process. Most times tenants respond and the process ends here. If they get the rent to us before the 4th day of delinquency, they are not assessed a late fee.
Step 3 – Send 3-day notice to vacate
If after 4 days we still have a late rent payment, we report the late rent payment to the credit bureau. We also send the tenant a 3-day notice to vacate. The notice is sent via certified mail return receipt. The letter states their obligation and amounts due for rent and late fees. At this point, the tenant knows we are serious and the rent payment is made. It is a very rare circumstance that the process escalates. If we have to move past this point, we already have the eviction process in motion.
Treat your rental property as a business. You do not live for free and neither do your tenants. When you have a late rent payment, your personal finances are impacted. Have a system and stick with it.
Collecting rent is the goal of your property business. It is the fruit of the labor with respect to renovating and leasing the property. Being a landlord doesn’t mean you have to be callous. It’s important to be cordial, prompt and exact in every encounter with your tenants. However, there is a difference between being nice and polite, and being your tenant’s friend. Being a friend makes it hard and awkward to collect rent or assess late charges. This is why I follow strict rules and guidelines for all my tenants when it comes to collecting rent.
Number 1: Never accept cash or personal checks.
When collecting rent, personal checks can bounce, and cash doesn’t have a paper trail. For your protection and theirs, only accept money orders or cashier’s checks made out for the exact amount. This way they can never claim payments they didn’t actually make, and the checks can’t be canceled or hot. You want trace ability of rent payments.
Number 2: Sign up for a P.O. Box.
If you’re like me and have properties spread out over a wide area, you don’t want to spend a whole week driving around and collecting rent. It’s a waste of time and gas. I use a P.O. Box nearby my home and use that address on all my leases, correspondence and instructions. I swing by at 6 p.m. on the due date and if the rent isn’t there, then it’s late. In disputes over when rent was mailed or received, make sure you check the stamp over the postage for a date. The post office marks each envelope with a date when it first goes through their system. If they claim to have mailed a check on the 30th, but the stamp says the 2nd, then you have proof for court.
Number 3: Use direct deposit.
Collecting rent in the digital age should be electronic. It’s the 21st century, and while we still need roads to get where we’re going, there are advanced methods of receiving rent payments. You can give your tenant your business account number and they can deposit the rent. Banks are secured, your money is safe, and they don’t have access to your account. This way there is no question about when rent was paid.
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Renting to relatives is fraught with financial disaster unless the arrangement is structured carefully. When it comes to the IRS, no good deed goes unpunished. You decide to help your kids get a good start in life and out of your house. You buy an investment property and rent it to your child for enough to cover the payments but $200 less than fair market rent. You don’t have a lease because it is your child. You are not looking to profit from your child but don’t mind the tax breaks. Everyone wins, right? Wrong.
Pitfalls of renting to relatives
To be considered a business, the IRS expects that you have the intention to make a profit. By charging your child less than fair market rent, your profit motive on buying the property will be destroyed. The IRS will consider the property a second home. You will be able to deduct taxes and interest but you lose the following:
You lose the possibility of the loss on sale deduction
You pay tax on the income from the property
Avoid thepitfall of renting to relatives
The arrangement should look arms length and structured like any third party arrangement.
Have a lease. Formalize the arrangement between you and your relatives
Establish profit motive. Charge fair market rent. Document the amount of the fair market rent. Do NOT discount the rent as a “gift”.
Do not reduce the rent if they do repairs or upkeep. Your brother should pay the rent. You can pay him for the repairs as a separate arrangement.
Have proof of payment. Make sure the money goes from them to you.
Make sure the property is your relatives primary residence. If mom and dad spend most of the time in Michigan rather than the rental in Texas, the Texas property will be a vacation home.
Ways to help your children and preserve profit motive
You can give $14,000 per year per person with them paying no tax. The gift should be independent of the rental agreement. They should be able to use the money anyway they want. It is a gift after-all. In no way do you want to do anything to destroy arms length agreement that destroys the profit motive.
Conclusion on renting to relatives
Rental property is one of the best investments available to people today. It builds wealth and reduces taxes. Ensuring all arrangements are formal and arms length ensures you get the tax deductions you counted on when you bought the property.