Top Four Apartment Rent Payment Plans, and Implications for Collections

Rent payment plans were almost unheard of in the market-rate apartment business prior to mid-March. But of course, COVID-19 changed our way of doing business overnight. Now, nearly all apartment operators offer some type of rent payment program.

Given the newness of these plans, operators had no previous history to understand what works best in providing residents flexibility while protecting property managers from increased delinquencies. With one month now in the books, there’s still much to learn. But based on conversations with apartment operators of varying sizes and in different parts of the country, we’re beginning to understand more about the pros and cons of each option – and what programs could be most sustainable.

Here are the four types of payment plans most widely offered, and our thoughts on each.

Deferred Payment Plans

These are the most common options. Renters who sign these plans agree to make a partial payment in April, and spread the balance out over future rent cycles – typically one to six months. Some operators will even offer to extend the payment window as part of an early renewal. Most property managers ask renters to pay a certain percentage of the rent – usually around 50% – to enter into a deferred plan, while others will accept any amount and carry the balance forward.

• Pro: These plans allow renters to pay what they can now without penalty for the unpaid balance. That’s a big help for renters short on cash. When tied to an early renewal, these plans also help operators protect occupancy during a period of low new-lease demand.
• Con: Deferred plans work only if renters can begin paying the normal rent plus the deferred balance within a month or two of signing onto the plan. You can’t return to this well more than once – or maybe twice, at most.
• Early Verdict: These plans were first designed at the beginning of the COVID-19 crisis, when the conventional view was that retail and restaurant and hospitality workers would be out of work for a while. But it’s now clear many laid-off renters will not regain jobs in the immediate future. These plans may, in hindsight, end up serving as stopgap measures before unemployment pay kicks in. The hope is that by offering partial payments in April or May, laid-off renters will be able to pay future rent plus the deferred balance once receiving expanded unemployment benefits of $600 a week from the federal government on top of state payments.

Flexible Payment Plans

This allows renters to make multiple payments over the course of the month without penalty, rather than the full balance up front. Property managers offering this option report this as the most popular program because it allows renters to pay as they receive paychecks or unemployment checks. In some cases, apartment operators are not formally offering flexible payment plans due to the administrative workload associated with it, but are accepting multiple payments without penalty.

• Pro: Flexible payment plans align with the cadence of how most renters receive income or unemployment pay. It’s much easier to make two to four smaller payments over the course of a month than it is to make one big payment up front.
• Con: Many property managers are not set up to easily accommodate multiple payments over the course of a month. It’s doable, but usually requires more staff time and sometimes more incremental cost.
• Early Verdict: Apartment operators have already taken unprecedented steps to adjust their business models to accommodate renters in a time of need, and all indicators are this is becoming another example of that. Flexible payment options aligning with weekly unemployment payouts make sense, and they are most sustainable.

Security Deposit Conversions

This is what it sounds like. The renter can apply a portion of their security deposit toward their rent bill. This option is not widely offered today among property managers.

• Pro: Deposit conversions can help offset rent payments for a month or two if renters expect to be in a better financial situation in the near future. The renter has already paid the money, so it removes the burden of deferred pay. It also allows the operator to immediately recognize the revenue rather than holding it aside in escrow essentially.
• Con: There’s clear risk in cashing out security deposits, removing that protection in cases where renters may damage a unit. Furthermore, this isn’t a sustainable option since you can only dip into that well so many times.
• Early Verdict: This plan may make sense in some cases, particularly for renters in good standing who should be able to pay rent in future months. But due to the inherent risks of removing a security deposit, many operators probably won’t utilize this option.

Incentive Programs

These are discounts a property managers gives to residents in exchange for a show of commitment. We’ve seen some creative plans that offer concessions for making payments on time over multiple months, or for residents who agree to extended renewal terms. These programs are not widely offered today.

• Pro: Incentive programs encourage payments in markets where property managers are concerned eviction moratoriums or charged political climates could discourage residents from paying. And for operators concerned about protecting occupancy given limited new lease demand, renewal concessions lock in renters in good standing for longer periods of time.
• Con: Incentive programs, by definition, take revenue away from the apartment operator. That’s a tough pill to swallow right now when you’re already well behind budget due to COVID-19.
• Early Verdict: Like security deposit conversions, incentive programs remain fairly rare right now. But apartment operators using them are vocal proponents, and that may encourage others to try it. Incentive programs could make sense in certain cities – especially coastal markets where activists are pushing for canceled rent – or in properties where you’re concerned about retention during periods of high expiration exposure.

Other Tips and Best Practices

At this point, we are seeing widespread availability of payment plans but not yet widespread utilization of them among renters. That could change going into May and into the summer. Many property managers are reevaluating their approach month by month.

• Nearly every apartment operator we spoke with said that rent payment plans are part of a broader desire to show flexibility, care and compassion toward their residents during a time of need. We’ve seen some very creative examples of resident care and engagement, some of which we highlighted in our recent webcast on payment plans. More will be highlighted in our webcast on resident engagement.
• More is better. Offering multiple payment plan options – usually deferred plans and flexible payment plans – equip you to best serve individual needs of each resident.
• Most operators are asking renters for evidence of a hardship, but are showing a lot of flexibility of acceptable documentation. That could include an unemployment claim, recent paychecks showing income loss, or anything else that would impact the residents’ ability to pay.
• Document everything. Put the payment program into an agreement signed – electronically when possible – by the resident and the manager.
• Know your local regulations and restrictions. These vary from state to state and city to city. Late fee and eviction moratoriums are very common. You do not want to expose yourself to lawsuits or negative press by not knowing the rules.