The Best (and Worst) Ways to Collect Rent
Landlords just starting out should be careful about how they plan to collect rent. Some platforms are not just inconvenient; they're risky.
It’s payday! How will you collect?
For landlords just starting out, the question of how to collect rent payments is an important one. Some platforms are not just inconvenient, but carry major risk if you’re not aware of the law or the payment platform’s policies. Savvy landlords will do all they can to protect their investment, and that starts by choosing a rock-solid payment method.
Popular payment methods include checks, direct bank transfer, cash, a peer-to-peer payment system (such as Venmo or PayPal) or a rental management platform like Tellus. Today we’ll be looking at some of the benefits and drawbacks of each system.
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Checks have been used to pay rent for so long that we assume it’s one of the more trusted methods. Checks are inconvenient at best, and dangerous at worst. It’s worth looking into alternative payment methods.
In the first place, checks are not instantaneous. It takes time between the tenant writing the check and the landlord seeing the money in their bank account. Checks can get lost in the mail, and landlords have no way of verifying a tenant sent payment until the check is in their hands.
Second, checks are not automated. Tenants must remember to write the check each month and mail it in advance of the due date so that it arrives on time. Once received, landlords must go to the bank in person to deposit the check. Repeat this process every month, and that’s a lot of stamps, a lot of waiting for the mail, and a lot of trips to the bank.
Furthermore, checks open up the door to some real risks. In some cities, like San Francisco, accepting a rent check from someone not on your lease automatically makes them a sub-tenant! With no screening or identity verification on your part, you now have someone on your lease and living in your rental unit, all because you didn’t look at the name on the check. If you ever need to remove this person, you can’t point out a no sub-tenant clause in the lease because you already accepted them. This will mean eviction proceedings.
Another risk for checks is that they can bounce. If the tenant has insufficient funds, you will not be aware of this until you go to deposit the check. Not only could this prevent you from paying your mortgage, but it could also delay eviction proceedings for non-payment. Depending on your state laws, there may be certain dates where a pay-or-quit notice must be delivered. Having a check bounce can delay this process.
Paying with cash has its appeals. It’s a liquid asset and can be used immediately for any expense. Plus—unlike checks—a landlord accepting cash knows for certain that a tenant has paid the rent. However, cash is difficult for record keeping. If a landlord doesn’t provide a receipt upon payment, it opens up the door for future disputes about how much was actually paid. Cash cannot be sent through the mail, and must be exchanged personally. Depending upon your area, the site chosen to exchange cash may not be safe, and there is an increased risk of confrontation, especially if this exchange is a routine that takes place every month.
Although tenants may argue it is more convenient, some who pay cash do not want to leave a record through checks or bank transfers. It’s always prudent to screen tenants before renting to them to make sure you know exactly who will be living on your property.
Many landlords see the risks of checks and cash and opt for a direct bank transfer. It’s simple, can be automated, and they receive the funds directly into their bank account. However, there are still risks to this method.
Landlords who require bank transfers must disclose a bank account number and routing number to tenants. This does not ensure privacy and could increase the risk of fraud. Direct deposit also is difficult for record keeping, since each payment is commingled with other transactions on a bank statement and must be recorded manually to keep good records.
Furthermore, direct bank deposits do not give landlords the ability to block partial payments. In some states, this is an important feature that must be in place if a landlord ever needs to evict a tenant. Depending on the law in your area, eviction proceedings can stop if tenants pay even a fraction of the cost of monthly rent.
For example, say you have a tenant who has not paid rent. You’ve given them notice to pay or quit, but suddenly, before that notice expires, you receive a measly payment of $25 into your bank account. Since you have accepted this payment (and by default all payments to your bank account would be accepted), the eviction proceedings grind to a halt and you are forced to begin again next month. The tenant continues to live rent-free on your property.
This type of payment method includes platforms like Paypal, Venmo. These methods are a convenient way to transfer money to people you know, but they are not without their disadvantages. Bookkeeping with peer-to-peer payments is not ideal, since rent payments are commingled with personal ones. Landlords wanting to keep good records (important for tax season!) need to transcribe everything manually with this system. Additionally, as with direct bank deposits, these platforms do not allow landlords to block partial payments, leading to problematic situations if there is a need for eviction.
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Peer-to-peer payment platforms usually cap how much a person can take out in a given week. For example, Venmo does not allow you to transfer more than $999.99 at one time unless you verify your identity with your birthday, zip code, and the last four digits of your social security number. Verified accounts can take out $2,999.99 at one time with a weekly maximum of $19,999.99. For landlords with multiple properties and mortgage payments, transferring funds every day for several days in a row is not just inconvenient; it’s stressful if you need to wait for the money to clear in order to make timely payments. Deadlines are tight in this industry, and you deserve an automated system, one that won’t leave you stranded if you forgot to make a transfer.
Transfers to your bank from Venmo take one to three business days, but Venmo reserves the right to review every transfer, which can result in funds being blocked, seized, held, or returned to sender. Even if the risk is small, why would you sacrifice your investment money over a misunderstanding?
Unfortunately, misunderstandings abound when it comes to landlord-tenant disputes. No one wants to anticipate a relationship going sour from the start, but it’s still important to protect yourself in case it does. Payment platforms like Venmo offer you zero protection if a tenant decides to dispute a charge. Even if the charge is the last month’s rent they owe you, peer-to-peer payment platforms tend to side with the buyer, leaving you short on rent money. In contentious situations, a payment platform with no knowledge of rental law is not your best friend.
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PayPal requires user verification to transfer large sums of money on a regular basis. In principle, this is a good thing, but some users have reported bugs in the system where their account becomes unverified and they can no longer make or receive payments. As a landlord depending on steady income for mortgage payments and other expenses, that’s a headache you don’t want.
PayPal claims that freezing accounts (what they call “limitations”) will often come as a result of a large spike in funds that is different from the normal pattern. This method of flagging accounts hurts new landlords just starting out or those who have recently acquired a new unit. For other users, there seems to be no discernable pattern or reason why their account was limited. Just search for “PayPal limitations” online and you’ll find way too many horror stories about frozen funds.
Even without account limitations, PayPal is still not ideal for paying rent. The way the system is set up, you can choose whether you would like a personal account or a business account. For personal accounts, there are no fees associated with transfers. However, you as a landlord have no protection if a tenant decides to dispute the charges. For example, say your tenant is moving out and has caused significant damage to your rental. You want to take it out of the security deposit, but the tenant disagrees. They dispute last month’s rent charges to PayPal, telling the company they never meant to pay that amount and they should be refunded. In such cases, the payment platform almost always sides with the payer, and you’re left short on rent money.
Perhaps this is enough to make you look into opening a business account. However, there are fees associated with this type of account (2.9% + $0.30 per sale for U.S. transactions). That charge can be passed onto the tenant, but there are better business models out there that are advantageous for both parties.
A better solution
None of the platforms listed above were designed exclusively for rent payments. This means landlords are not covered when it counts. With all the risks and drawbacks, landlords stand to lose money if they are not careful. It’s 2018, and everyone is looking for a better solution.
If you’re a tenant, you want something convenient. Checks are not built for the way you operate; most tenants—especially millennials—prefer paying rent from their phone or computer. Having something automated can give you peace of mind, so you never have to worry about late fees or losing your housing.
If you’re a landlord, you need protection against payer disputes or partial payments a tenant might make to avoid eviction. Few landlords want to be taking endless trips to the bank; most want rent money to go directly to their bank account. You deserve something automated so that tenants won’t forget to pay and so that you won’t be late with your mortgage payments. You also need something with no transfer limits so that you can focus on growing your portfolio without outgrowing your payment platform.
Landlords also need a system to help them keep good records so that tax season isn’t a nightmare. Being able to track income and expenses is key to good rental organization and making sure you have positive cash flow.
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Tellus: a platform designed for rent collection (and so much more)
What the rental industry really needs is something simple, automated, and secure. Using a rental management superapp like Tellus gives landlords extra peace of mind because it was designed to collect rent. Landlords have the option to set up late fees that are automatically enforced if a tenant does not pay on time. Partial payments are blocked, giving landlords a full range of options if they need to evict tenants for non-payment of rent. There are no transfer limits, leaving landlords with multiple units free to collect rent at the same time without the risk of a frozen account when you need the money most.
Best of all, Tellus is free for landlords and tenants. Bank-grade encryption is in place so that all your financial transactions are secure.
For too long, the rental industry has been living in the past. We’re ready to leave old payment methods behind and adopt something new. Rent collection is just the tip of the iceberg.
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