Although outstanding rent would never be an issue in a perfect world, it's important for landlords to know how to deal with this occurrence, especially in light of the COVID-19 pandemic. With that in mind, we've created a guide on rent arrears below. Read on to learn what this term means, how it impacts landlords, and what you can do to prevent it from happening.
What is rent arrears?
Put simply, "rent arrears" is the financial and legal term for an overdue rent payment. When a tenant owes unpaid rent to the landlord, the rent account is said to be in rental arrears until the renter makes up the missed rent and brings the account current.
How does rent arrears affect landlords?
While making payments on time is a key expectation spelled out in any tenancy agreement, arrears can happen during tenancy, especially in down economies when job cuts are frequent. When it happens, the landlord often struggles to pay the mortgages on their rental properties and can end up in debt.
Eventually, if the amount of unpaid rent is great enough, the landlord may need to take legal action. In this case, that often means going through the eviction process or going to small claims court to collect the missed rent. Unfortunately, both those processes can be time-consuming and expensive, so it's best to avoid taking that step whenever possible.
Four strategies to avoid rent arrears as a landlord
Now that you know more about what arrears is and how it can affect your investment strategy, the next step is to learn what you can do to avoid it. To that end, we've listed some practical steps you can take to avoid having to chase after outstanding rent altogether.
1. Have a thorough tenant screening process
The first step you can take is to have a thorough tenant screening process for your tenants. At the very least, it's a good idea to check their employment history and credit score. Since rent is a priority debt, most tenants will make an effort to take care of that payment, but renters with a solid work history and high credit score may be especially likely to do so.
2. Offer a repayment plan
If your tenant has been diligent up until this point and is in arrears due to unforeseen circumstances, such as a job loss or a medical expense, it may be wise to reach out to the tenant and offer a repayment arrangement. While you shouldn't give debt advice, you can make it easier for them to make up for their missed rent.
In this case, the repayment arrangement can be anything that works for both parties. For example, you could offer them a reduced rent payment for now, with the intent to collect any missed rent once they get back on their feet.
3. Change the move-out rules in the lease
On the other hand, if their inability to pay rent seems to be more of an ongoing issue, it may make sense to consider changing the move-out rules in your lease. The caveat here is that this move may result in the forfeiture of any back-rent payments you're owed, but it will give you the flexibility to find a new tenant who will be able to pay.
4. Consider court action
Lastly, it may be worth it to consider taking legal action eventually. At the time of writing, there is an eviction moratorium in place as the nation works through the COVID-19 pandemic. However, that is not always the case. If you want to remove the tenant from your rental property and receive the payments you're owed, going through eviction proceedings may be your best option.
The Millionacres bottom line
At the end of the day, no landlord likes to think about a rental account being in arrears. However, in some cases, it is unavoidable. With that in mind, this post is a guide on the topic. Use this information to help you understand what rent arrears is, how it can affect your bottom line, and how to keep it from happening.