To Keep a Tenant of Not, That’s the Question

[Bryan Mitchell]

This tenant has been late 4-5 times this year. They moved-in 2018. This landlord wants to raise rent to be closer to market rents by another $50. Small increase to most but probably not this one. Keep or not? Why?

[Erik W.]

I have seen many variations on this question... "The tenant pays late....the tenant is sloppy....the tenant hoards...the tenant moved in her boyfriend/girlfriend without approval..."

The key to answering ALL of these questions is to avoid falling victim to "sunk cost" fallacy.  Briefly, the sunk cost fallacy assumes that "since I'm already here, I might as well stay."

The better question is to evaluate based on what would you do today if you had a vacant unit in the condition it is today?  This allows you to move away from laziness/inertia and make a wise business decision.  For example...

Let's say this unit would cost $1,000 to freshen up in the condition it is today.  Further, it would cost you 4 weeks of vacancy to move the tenant out, freshen up, and find a new tenant meaning you eat a month's vacancy.

By keeping the tenant, you avoid that cost.  However, you may incur more costs going forward if the late pay signals financial disorganization that may lead to an eviction and additional damages, which means you would spend more than $1,000 on freshening (maybe $2,000!) and would have an even longer vacancy because it would take more time to remedy the greater damages.

By moving that tenant out, you incur the known cost of $1,000 plus a month's lost rent, but you could re-rent at a higher rate and recover it more quickly.  You would also (potentially) reduce the stress of late pays with a better quality tenant.

There is a third option: keep the tenant, raise the rent, and put them on a payment plan that ensures timely payment.

Try this: 

Step 1: raise the rent $30/month.  No one moves over $1 day extra rent unless they were already going to move out anyway.  

Step 2: Make their rent due the day OF or the day AFTER their payday.  Require payment by ACH/auto-debit and schedule it to hit on the due date when their account should have money in it, assuming they aren't overdrawn by more than their pay check.

Step 3: Offer alternative payment arrangements.  For example, if they get paid every two weeks, divide their rent in two chunks and take that amount every two week.  There is no magic to the 1st of the month.  I collect rents all month long.  It's not hard.  A calendar, a dry erase board, or spreadsheet makes it easy to track payments.  My bank's Business Services Department offers ACH / auto-debit: check with yours.  I input the rent batch a few days early, set it to process, wake up in the morning and there is the money.  The only time there's a problem is if they are overdrawn/insufficient funds, in which case you know within a day or two vs. waiting 10-20 days for a check to bounce or listening to endless promises that "I'll pay you in a few days..."

The other advantage to offering bi-weekly payments is if the tenant is short a few bucks, it is much easier for them to borrow and/or find that money elsewhere.  Let's say rent is $1,000 and they pay $500 twice per month.  Much easier to come up with $500 than $1,000.  

Most people give up if they see a mountain ($600 short on monthly rent) in front of them, but they might try to climb if it's only a small hill ($100 short on bi-weekly rent).

Easy payments.  Many industries have figured this model out.

P.S.  If you're like me and enjoy math, I'm sure by now you've realized that paying 50% of the monthly rent rate every 2 weeks means you get 3 payments in a month every 3 months or so (i.e. the "extra Friday").  There are 26 two-week periods in any given calendar year, and so you would collect 26 half payments which equals 13 whole month payments.  That's your incentive for being "flexible."  Just be sure the tenant realizes they are not buying rent by the month.  Rather, they are buying rent two weeks at a time.  You can still have a lease that runs for 1 year, but that doesn't mean you have to collect rent one month at a time, does it?