As a landlord with rental properties, there is one very important number to keep in mind: the day your rent is deposited into your account. That is not the day that the rent was due; it is the day the rent was received.
Most landlords don't realize they have a problem collecting rent until it's too late and have allowed 3 months to go by creating a habit of late payments. Then there is a financial crisis at hand when a tenant owes more than a single month's rent and the property owner is searching for answers as to how this problem occurred.
More posts on Landlord Tips and Advice. We manage over 1,000 properties in the Houston area for our landlords and we see a lot of mistakes that landlords make with rent collection. Here is a honest look at why getting paid on time is so hard and how you can set up a system of payment to help ensure that you get paid on time. Also, we will go over what Texas law allows for late charges on rent.
Why Getting Paid on Time Is Harder Than It Looks
$103,800 - delayed cash flows from late paying tenants
If Area Texas managed 1,038 properties averaging $2,000 per month in rent and only 5% of those units paid their rent late in a given month then that equals 51.9 units of late paying tenants and a total of $103,800 in delayed cash flows. To a single property owner with a handful of rental properties, the situation of a late paying renter could be viewed in a completely different perspective if they were to manage a large portfolio of rental houses. Then the situation would no longer be seen as an occasional, and possibly isolated incident; rather a late paying situation would begin to develop into a regular and consistent habit of delinquent paying for one of their renters.
One late payment of $2,000 can be an inconvenience for 3 weeks but start a habit of late payment. For a single family home, that late payment of $2,000 can be a financial burden to collect on time.
Once the bad habit of late payment has started, it can be very difficult to stop.
How To Charge Late Fees In accordance with The Texas Law
Texas Property Code §92.019 caps late fees at 12% of one month's rent for properties with four or fewer units. On a $2,000/month rental here in Houston, that puts your maximum late fee at $240. For larger complexes, the cap drops to 10%.
Also important to note is that you cannot start charging late fees until 2 full days after the day that rent is due. This means that for example if rent is due on the first of the month and you start charging late fees on the 2nd, you will not be able to legally collect those late fees. In order to start collecting late fees you must wait until the 3rd of the month in this example. It is good to include language in your lease to let your tenant(s) know when late fees will start to be charged. Then you just have to consistently enforce late fees on every unit every time.
So, in summary, when calculating late charges to collect past due rent the day of the year that rent actually hits your account (after all delays in mail, etc) and charging late charges on the following day (after all stated grace periods in Lease Agreement) and doing this and collecting on time every time is key to a collection system that will assist you in evading troubles in Texas rental properties.
The Pattern That Kills Your Leverage
Accepting partial payments of rent can potentially reset the time for eviction. We had an owner of a single family home in Spring Branch who for three months allowed a tenant to pay half of the rent due each month. The owner had told the tenant that he would accept partial payments in order to keep the rent current. By the fourth month, the tenant owed over $4,000 in past due rent. When the owner attempted to evict the tenant, he was advised that accepting partial payments had the potential to reset the time for eviction and that he would have to begin again from the start with a new notice.
Accepting partial rent payments can also have consequences when attempting to evict the tenant. In many cases, the landlord has inadvertently created a pattern of acceptance of late payments which will pose significant challenges to successfully completing an eviction in court. The key to avoiding these types of issues is a strict written policy for dealing with late payments and for adhering to that policy every month with every tenant.
How Online Payment Systems Protect You Legally
We have had a number of clients who continue to collect their rental payments by check, cash or by way of applications such as Venmo. The typical reason given for doing so is that it is convenient for the owner but in actual fact it creates problems for the owner, often leading to delays in receipt of payment as well as a host of other problems that can arise, particularly in relation to proof of payment.
Checks get lost in the mail. Personal checks make for strange tracing when the largest of disputes occur. We have seen many instances of mailing checks where two to three days turn into 3 to 5 days and occasionally get lost in the mail which cause the greatest of disputes as to whether or not a payment was ever made. We currently use AppFolio for collection and processing of all payments made on our properties and the only time there is an issue is when there are issues with ACH. ACH payments go through the portal in 2-3 business days to process.
Typically, ACH payments are processed and make their way to the bank and to our account within 2 to 3 business days. Therefore, owners must always remember to plan their cash flow around this timeframe for timely rental income. However, outside of the time frame in which the rent will clear in a bank account, the biggest advantage of online payment systems is that the owner's record will clearly show proof of payment as well as the exact payment amount and payment date for every single transaction and transfer. A record such as this is invaluable for countering any claim by tenant(s) for instance that they did, in fact, pay on time only to have landlord(s) claim otherwise and even file an eviction suit in court.
In general disputes such as these are easily resolved when payments have been collected through such portals. A property manager from our company notes that even when a tenant tries to argue that a payment was not received and a filing for eviction is made that the documentation of the tenant's on time payments through the online rent portal generally prevail.
When Eviction Becomes the Conversation
Eviction is a very sensitive subject and most people do not even want to bring it up for discussion. However, ignoring the issue will not make it go away or make it cheaper. In Harris County, a typical eviction filing will cost a landlord approximately $121 – $150 in filing fees. In addition to the filing fees, a landlord will also have to pay for attorney's fees to represent them in court. Typically, an eviction takes 3 – 6 weeks from the date of filing before a landlord can even begin to try to re-rent the unit back out to new tenants. A single month of vacancy on a $2,000 per month rental unit can end up costing the landlord $2,000 in lost rent plus any additional costs associated with getting the unit back to rent ready status. This can end up costing a landlord as much as $4,000 – $6,000 per incident.
For most property management issues, owners realize that being as cold as possible as to handle the situation quickly is usually in the best interest of both the owner and the tenant. Once a tenant realizes that they can let rent payment be late time and time again without any consequences, it is rare that they will start making timely payments. In order to save your self and your tenants from this type of stressful and potentially expensive relationship, it is generally better to evict a tenant as soon as possible after they have stopped meeting the terms of the lease agreement. Serving the proper notice is key to having a strong case in court, but starting the eviction process as soon as possible is also important to saving as much money as possible and to preventing as much stress as possible for both the owner and the tenant.
Texas is a very landlord-friendly state. One item of importance that must be in your lease is the amount of time the tenant has to pay rent after it is due. In Texas, there is no mandatory grace period (e.g. 5 days) after which a late charge can be assessed. Instead, the grace period is determined by the lease agreement and can be as little as 2 days. However, there is a two-day rule that must be followed in assessing fees for late payment of rent. The two-day rule refers to the amount of time after which an owner can begin the eviction process on a tenant who is not paying rent. That amount of time is two days after the time in which the rent is due (as stated in the lease agreement).
Tenant Screening / Find the Right Tenant to Begin With
The easiest late payment to deal with is one that has never happened because the owner collected a quality tenant via a thorough screening process.
This affects the initial terms of the tenancy prior to collection of any late payments. Area Texas found that the two properties taken over by us initially had vacant periods of over 45 days. The adjustment to bringing the rents to the current local market in which to fill the properties quickly meant the owner filled the two properties with ideal tenants prior to what may have occurred had the owner priced the units for lease initially based off of guesses as to fair market rent. This also provided the owner with more options to choose from for quality potential tenants.
One thing we see over and over in Houston is that there are many different kinds of tenants renting in different neighborhoods throughout the city. For example, young professionals in Midtown (77002), East Downtown (77004), and Downtown (77003) tend to have different profiles than families with children renting in established subdivisions in Katy or Pearland. The Energy Corridor (the 77077, 77078, and 77079 zip codes) has by far the greatest concentration of petroleum employees in the Houston rental market, and their income can be very volatile during the downturns in the oil and gas industry. Because of this, we pay a lot of attention to a renter's employment type and stability when screening applicants in these submarkets.
Area Texas uses Pet Screening for all pet applications. As mentioned previously, undisclosed pets are one of the top reasons for lease related disputes. By thoroughly screening for pets, and having documentation of approval for pets, there is less chance of disputes regarding pets in rental properties.
Managing Requests for Rent Extensions from Tenants
Life happens. Many landlords throughout the city of Houston experienced the effect of Harvey in late 2017. There were instances where hardship was created by the extreme weather that led to tenants ask for a rent deferral or even partial abatement.
Keep all life changes including decisions to rent a home in writing and agreed to by both parties prior to move-in. If a lease is in place and your tenant is no longer able to pay rent as agreed then start the eviction process as soon as possible. Landlords lose money quickly when a tenant is allowed to stay past the time when rent payments are no longer made voluntarily by the tenant.
Diluting Late Payment Rules Only Lead to Chaos. We recall on multiple occasions speaking with a manager of single family home rentals here in Houston. This owner wanted us to agree to reduce late charges in order to get a tenant to get back on track. Remember our discussions of Late Payment Rules and Patterned Expectations – the ultimate tenant diluter is the owner of a single family home rental who views late rent payments on an instance by instance basis rather than based on rental contract terms agreed to by the tenant when they agreed to rent the home. That owner wants us to give their tenant more time or reduce charges in order to hopefully avoid evicting the diluting tenant in the future. The way to save a diluting tenancy is to start the eviction process immediately and keep that process moving as quickly and efficiently as possible, following all applicable Texas landlord tenant law steps along the way.
Area Texas worked with an out-of-state owner who was previously collecting rent on his Houston property. Because he lived far from the property, every late payment created significant stress. We collected all of his prior late payments and responded to all of his subsequent inquiries in a timely fashion, thereby alleviating the anxiety of remote landlord investing and allowing him to continue to profit from his investment.
Building a System That Actually Works
The simplest way to manage late rent payments is to avoid them by choosing the right tenant for your rental property in the first place. That being said, having the right late payment management system in place is also very important. The best late payment management system is made up of several components including: lease language, payment processing, late rent enforcement, and a property management company that will follow up with tenants on your behalf to collect past due rent.
This allows Houston rental property owners the ability to operate their investment without the need for local rent control ordinances, instead relying on the Property Code in Texas state law. There are no Houston rent control laws or local landlord and tenant laws in operation. Instead, all rental property owners within the city and surrounding suburbs such as Sugar Land, The Woodlands and Katy are governed by the laws in place that apply statewide in accordance with the Texas Property Code.
Not to harp on this, but the hardest part of the job for self-managing landlords is usually to keep from being too friendly with their tenants. They've become friends, they've become familiar with their tenancy, and so it's hard to assess a late fee or serve a notice for unpaid rents when they know the person. This is where the team at Area Texas can be of the greatest assistance. We have been managing rental properties in Houston for over 30 years, and we know that as an owner you want to be treated with the same respect and professionalism that you extend to your tenants. This is why we only get a management fee when rent is collected on time. Our interests are 100% aligned with yours.
FAQ
How late can rent can be in Texas before a landlord can charge a late fee?
Under Texas Property Code §92.019, a landlord cannot charge a late fee for the portion of rent that has been paid on time. Thus, for example, if the rent for a given month is $1,000 and the tenant pays $800 on time but fails to pay the balance on time, the landlord cannot charge a late fee on the $800 already paid. The landlord cannot charge a late fee until two full days have passed since the date which the rent was due. Thus, for example, if the rent for a given month is due on the first of the month, the landlord cannot charge a late fee until the third day of the month.
Can a tenant's partial payment of rent affect my ability to file an eviction in Texas?
Late payment charges cannot be imposed until two full days have elapsed after a payment was due. For example, if the first day of the month is the date which which rent is due, then the third day of the month is the earliest date on which a late fee could be charged. It is also important to make sure that the lease states the late charge provisions correctly, and that those provisions are applied consistently to all tenants. If a tenant pays some of the time required rent, for example, the owner must deal with that payment in a manner which does not waive any part of the balance which is past due. A written agreement which states the amount of time that the tenant has to pay the balance would be ideal. However, it is also acceptable to contact an attorney for advice as to how to proceed with collecting the entire amount which is past due.
What does an eviction actually cost a Houston landlord?
The cost of an eviction in Harris County can typically run anywhere from $121 to $150 to file in Justice of the Peace Court, plus any time lost by tenant non-payment of rent, and then possibly attorney's fees for service of process and appearance at trial, all added to potential vacancy and turnover expense. In total, an eviction can cost anywhere from $4,000 to $6,000 per unit. That's why it's so critical for landlords to have rental income collected on a timely basis.
AppFolio vs. Rent Collected by Check – How Does That Work for a Landlord?
This creates a paper trail that shows when payments were made. This is much better than paying rent by check or cash. Even using peer to peer payment methods like Zelle or Venmo, for example, create more problems than paying by an online portal like AppFolio.
Does Houston have any local rules about rent increases or grace periods?
No. Rent control laws are governed by the State of Texas and are set forth in the Property Code. As such, municipalities within the State of Texas cannot enact local ordinances regulating rent, including increasing the amount of time a landlord has to collect rent. Specifically, there are no local ordinances in Houston, in Sugar Land, The Woodlands or in any other city in the Houston market governing rent increases or additional late payment periods beyond that set forth in a Lease Agreement. Specifically with respect to the two-day rule governing the assessment of late charges, this rule simply sets forth when a landlord may charge a late fee, and does not affect the amount of time required to evict a tenant who has failed to pay rent in full when due.
What should I look for in a property management company to handle rent collection?
Look for a payment system (internet, mail) that documents every payment. Late fee policy must be clear and consistently enforced. There is no sense paying a management company a fee until you get paid! And that is exactly what we don't do at Area Texas. Check our pricing to see how our fee structure keeps our incentives aligned with yours.
