Late paying tenants are one of the biggest headaches for a landlord. An experienced landlord will build late fees into their lease and do proper tenant screening to avoid this issue…
… however, even the best landlords can still deal with late paying tenants.
A question worth asking, is why do tenants not pay rent on time?
The rent is a known expense that is due each month and should be budgeted for.
It can be easy to say that your tenant is irresponsible, but it turns out there is a psychological effect in play called “The Scarcity Trap.”
The scarcity trap is covered in great deal on this Hidden Brain podcast.
What Is The Scarcity Trap?
The Scarcity Trap is a psychological phenomenon where people obtain tunnel vision towards the resources that become scarce.
One example is the, “The Minnesota Starvation Experiment” where 36 young men were starved in an experiment.
These men wanted food so badly they would spend all of their cognitive resources (attention) on food. Your mind focuses on what you don’t have and tunnels your focus.
These men spent all their time talking about food, making jokes about opening restaurants after the experiment. They were shown movies and only talked about the food scenes from the movies. They became obsessed with what was scarce in their lives.
Brandy Drue is an example of someone who lost her job and fell into the scarcity trap. In the Hidden Brain podcast, her available bandwidth became focused on preservation and stockpiling resources for her family.
She talks about how she lost her job and quickly spent too much money on groceries and other items that were immediate needs.
She tunneled her vision to immediate problems (this week) but forgot things that were on the horizon (such as rent and utilities).
She never had an issue with budgeting until money became scarce. Then she lost her ability to properly budget for her family and went on a spending spree for toiletries and groceries.
She did this because her attention had tunneled on her money issue and she lost her ability to think weeks in advance.
“When you’re in a hole, why dig yourself deeper?”
The podcast also talks about issues with sugarcane farmers in India. They’re a great example of the effects of scarcity when it comes to money.
They’re paid a one-time lump sum for their year of work upon harvest.
Before harvest these farmers are pretty poor.
After harvest they’re pretty rich… for about a month.
The same person before harvest and after harvest are poor and then rich.
Researchers found, that post-harvest, the farmers have much better impulse control. They were able to invest in the long-term including spending the time to sow their fields for next year’s harvest.
Farmers who were poor, were only capable of focusing on short-term thinking. They thought only about money and became poor planners.
How Does This Effect Renters?
There are really three reasons a renter won’t pay rent on time.
- They have the money but are not good at keeping at schedule
- They have the money but are intentionally not paying
- They don’t have the money due to loss of income or poor budgeting
#1 They have the money but are not good at keeping at schedule:
In this case you have someone who is not good with their commitments. The easiest way to keep them honest is to institute a late fee for late rent. If there is no consequence there will be no urgency to pay rent on time.
#2 They have the money but are intentionally not paying
This is a big issue. You have rights as a landlord to be paid on time.
If your lease lays out clearly when rent is due, your tenant is in violation of the lease when rent is late. You can use this lease violation to serve a “Notice to Pay Rent or Quit” form (NPRQ form). Basically, pay rent or you will be evicted.
#3 They don’t have the money due to loss of income or poor budgeting
This is a situation that can be avoided proactively via your tenant screening techniques.
First, make sure you have a “rent to income ratio” standard in place.
A widely used standard is to require that the rent cannot exceed 30% of their monthly gross income. This means if you’re charging $1,000 in rent… the applicant must make at least $3,333 a month in gross income. If they don’t meet this requirement, they will either requirer a co-signer or will not be considered for the rental.
Quick Tip: Dividing an applicants gross annual salary by 40 will give you the maximum amount they can afford each month on rent based on the 30% rent-to-income ratio. The calculator above shows that a $40,000 gross annual salary should not exceed $1,000 in monthly rent.
Secondly, make sure you verify their income and work history. Call their current employer and verify how long they’ve been employed for. An applicant with 30 months of work history is less of a risk to lose their job compared to someone with 3 months of work history. Factor this into your screening considerations.
Budgeting for rent becomes difficult for a renter who has just lost their job. This is because they can fall victim to the scarcity trap, and are not cognitively able to focus on rent for next month, when there are bills piling up today.
That is why thorough screening is so important to find steady renters.
After all… you don’t want to have a late paying tenant tunnel your thoughts as well.