January 16, 2013
KPI: Rent Arrears to Watch
There are many factors involved in making your property management business a success – practicing good maintenance, marketing your buildings, attracting the right tenants and ensuring sound operations. But ultimately, you have to ensure that your processes result in good cash flow; without that, it’s very difficult to run your business smoothly.
As a REIT or property manager, your biggest source of revenue is, of course, rent. Therefore, it’s critical that you keep a sharp eye on your tenants’ arrears so that you can maintain consistent, healthy cash flow.
Here are a few KPI rent arrears to watch:
- Percentage of current tenants in arrears
- Dollar amount of tenant arrears
- Average dollar amount per tenant in arrears
Numbers and figures will vary depending on the size of your operations, but in general, you want to keep the percentage of tenants in arrears to less than 3% over three days.
Lowering your arrears
If your numbers aren’t in line with the above figures, or if you simply want to reduce your tenant arrears further, don’t worry – you have options. Following are a few tips to help lower your arrears:
- Before approving new tenants, make sure they meet pre-set income-to-rent ratios. A recent study by rental website Rent.com, which was conducted among the site’s property customers, found that: “Forty-six percent of respondents say that a renter’s gross income must be at least three times the monthly rental rate, though 30 percent say that 2.5 times is enough.”
- Establish mandatory automated payments, through online banking, credit card or other means. This will eliminate the risk of late payments, which often arise when accepting cheques or manual online payment.
- Use your tenant portal to automate invoice notices seven days before rent is due. If you don’t implement mandatory automated payments, this serves as a vital reminder to tenants; if you do, it serves as a courtesy to let them know that the money will soon be charged to them or withdrawn from their accounts.
- Employ SMS, phone calls and letters for tenants who are in arrears. Politely let them know that you’re monitoring the situation and that you expect prompt payment. Automate these processes to encourage better tenant behaviours.
Assume the best, prepare for the worst
Most tenants are good people who want to pay their rent on time. So it’s best to proceed from that perspective, and give loyal tenants the benefit of the doubt.
Still, it’s your responsibility to protect the bottom line. Having processes in place to minimize arrears, and deal with them when they occur, is just good business. If you take a few simple precautions and monitor existing arrears, you’ll be well on your way to ensuring a healthy cash flow.