What do you think of offering a discount for paying rent early?

Question

I met a landlord who offers tenants a discount for paying rent early instead of adding fees for paying late. It seems to work for him. What are your thoughts?

Jeff Rabinowitz · Answer

I rarely have a month where I don't get late fees. I put all of my late fees into my "liquid fund". The funds are used to purchase scotch. My tenants have paid for some very nice bottles. I like late fees.

Jonathan Key · Answer

You are my hero.

Tom Keith · Answer

We have one buy and hold property that was purchased as a turnkey with minor upgrades. The previous owner had been using a discount for paying before the first and we continued the practice. The discount is $50 if rent is paid anytime before 5:00pm on the last day of the month.  The full rent is due on first day and there will be late charges if not paid on time or after grace period.  The discounted price is still good tent for the property so I do not feel we are losing, the tenants like the discount and utilize it.  This is just one tool and we like it.

Roy N. · Answer

Aly,

Mathematically speaking, the notes against our mortgages are discounted by early, and frequent, payment ;-)  On our smaller residential properties we have 5-yr term, variable rate mortgages (prime - 0.45).  All mortgages were originally subscribed with a 25yr amortization on the corresponding note.  Through the simple choice of making bi-weekly payments, as opposed to the default of monthly, we have cut 5-7 years off each amortization and reduced the amount of interest paid by thousands of dollars.

Getting back on topic, we have used the carrot approach to convince tenants to move from cash to electronic payment (pay electronically and you save 5%), but have found the stick to be more effective in dissuading late rents.

Roy N. · Answer

Chris L.

My example above was about making bi-weekly mortgage payments.

However, we once had a tenant who paid her rent bi-weekly (in-advance) ... so by the end of the month, she had deposited the next month's rent.   She asked for this arrangement as it fit her pay schedule and she did not trust herself (or maybe her somewhat of a bum partner) to hand onto the rent money until the end of the month.

Jeff G. · Answer

Chris L. I think I need to object to the idea on philosophical grounds.

When you extract a late fee it's because the tenant has caused you legal injury because if their failure to pay on time. If you "discount the rent" for paying early, respectfully, it feels like you've transitioned from landlady to land-nanny.

Vacancy is a bigger threat to your bottom line than mild tardiness with respect to payment. I know some landlords that take a lesson from cell phone shops: they use inexpensive loss leaders to secure longer term contracts.

How this usually works:

Someone signs up for a lease with a term of 14 (or 18) months instead of the more typical 12 months. In exchange they're given a loss leader such as a 50" TV or an iPad for "free." The value is agreed upon contractually in a lease addendum and is usually more than the landlord paid e.g., a $250 TV with a contractually agreed upon "value" of $600. If the tenant breaks the lease the value in the addendum is added to any future collection attempt.

If done correctly, in the right area, this can decrease the amount of turnover and increase the speed with which you take on new tenants in the event of a vacancy. What do you think?

La Nae Duchesneau · Answer

I do not do that. I do however charge a late fee if they pay late. I do not get a reward for paying my charge card bills early. Who ever heard of such a thing. They are responsible adults aren't they?

They should pay their bills on time like the rest of us. I charge my tenants a $50 late fee after the 5th, and recently I went to $5 a day late fee after the 5th.

Chanté Owens · Answer

I wrote about this awhile back on another thread, but in my prior apartment complex when the manager that moved me in was there (he got promoted about 6 months of me living there); he used to have an incentive that if you paid your rent early, you'd be entered into a drawing to win $25.

In the grander scheme of things, he managed two buildings that were 8 stories, and had at least a few hundred tenants, so him offering $25 to ONE tenant a month was not a lot of money. AND, for him, he was able to get people to pay their rent before the 1st, so that money would be in their property management company business account accruing (minimal interest), versus in the tenants account.

Chris L. · Answer

Thanks everyone for your input! A few thoughts I had were that the  approach may very depending on the type and income level of the tenants. My reasons for considering it (besides being a potential way to get rent on time) were:

-It could build good juju between the landlord & tenant if the tenant is getting their discount each month

-If they break the lease early, you can go after them for the full rent of the remaining months, not the discounted rent (or this a problem that happens more often in NYC?)

-How it makes you look in court if you do end up having to take them to court. Maybe it would be harder for them to paint you as an evil landlord.

On a side note, @Roy N. I like your bi-weekly approach. I know a landlord who does that with his mobile home park tenants and gives them 2 weeks rent-free (one payment off) at Christmas if they were good tenants. They appreciate the "gift".

Elizabeth Colegrove · Answer

First off, check your market and make sure that is legal!

Second off, that can be really hard with areas with ceilings. My area you market a place $25 above the "ceiling" and no one will look at your place. So giving the discount doesn't do anything but cut into your margins!

Third off, train them right and they will pay on time. Plus a 10% late fee downs't hurt (again check your area!)

What do you think of offering a discount for paying rent early?

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