Setting up Direct Deposit Rent to Landlord (Is it a good idea?)

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One of the easiest ways to collect rent is by setting up direct deposit rent to the landlord.
This makes it easy to collect rent each month because the money is automatically withdrawn from the renter’s bank account into the landlord’s account.
Just because something is easy doesn’t always mean it’s a good idea though.
A commonly asked question by both new and seasoned landlords is “How should I accept rental payments?” The days of writing a check have become outdated when there are many new options to take into account. Please see the pros and cons highlighted below by attorney Ronald L. Dunn, Esq.
Many landlords are arranging direct rent deposits by their tenants. This is accomplished either by arranging the following:

  1. Automatic withdrawals from tenants’ bank accounts, or
  2. Direct deposit by tenants into landlords’ accounts.

These can be an invaluable strategy, especially for out-of-town landlords who have no local property management. They are not without risks, however.

Automatic Withdrawals

With automatic withdrawals, there is little risk to the landlord, other than the tenant having insufficient funds in his account or insufficient credit on his credit card. The convenience and reduction in administrative costs make this option especially attractive. Landlords should double-check their bank’s fee structure for making automated withdrawals, particularly in the event of insufficient funds or if a credit card is involved.

Direct Deposit Rent to Landlord

When a landlord gives her tenant her banking information, however, there are significant risks. First, a person she doesn’t know and has no reason to trust has access to her banking information. With the rampant fraud in today’s digital age, extraordinary care should be taken to limit tenants’ actual access. Check with your bank on how best to keep your banking information secure.
Second, and perhaps most significant, is the problem of the defaulting tenant. If the tenant is in arrears, he controls when he pays and how much he pays. If the landlord has commenced eviction, some states will invalidate the eviction upon receipt of any rent – even partial rent. Having to restart your eviction upon receipt of a direct deposit of $20 can be costly and frustrating; check with your attorney to see if this applies in your state, county and city.
You can address this problem by careful drafting: add a fee to your leases for creating and serving any eviction notices. Paying a fee may not be sufficient disincentive to the crafty tenant, however.

PayPal Rent Payments

One of the pioneers of web-based electronic payments, PayPal remains secure and trusted to this day. Additionally, landlords do not need to disclose their banking details to their tenants in order to receive rent payments through PayPal, they need only give the tenants their email address. PayPal is available to anyone with a checking account and an internet connection, and offers instant electronic payments over the internet.
That said, PayPal has its own drawbacks:

  • Users need to select that the payment is “personal” in order to avoid a transaction fee.
  • There is usually a delay when PayPal users go to transfer funds from their PayPal account to their checking or savings account.
  • In giving the tenant control over when and how much rent payment they send, landlords and property managers risk invalidating a pending eviction case, although because the rental payment can be rejected and refunded in PayPal, it’s less clear whether the payment has been “accepted” for legal purposes.

Accounting

There may be local legal requirements for segregating and accounting for rent received. There are some states, for example, where rents and security deposits cannot even be held in the same account. Be sure to thoroughly review our State Assist information when creating lease agreements, and consult an attorney to determine whether you need to keep a separate account for direct deposit or automatic withdrawal rent collection.

Direct Deposit/Automatic Withdrawal Exclusively

There are industries where automatic withdrawal from checking or credit card are the only option for tenants: storage units, for example. There are, however, different issues in play when it comes to residential housing. Local or state government may and sometimes do enact restrictions on limiting how a tenant may pay for housing. Check with your attorney to determine what the rules are where you own rental real estate.
The easy availability and convenience of internet banking, electronic transfers, automatic withdrawal and the like open up new avenues to landlords for streamlining their rent collection and accounting. While there are risks, those risks can be minimized by careful planning and understanding of state (and local) laws.
Disclaimer: The information provided herein is intended as a general discussion of legal issues concerning landlord tenant law. Information provided is not legal advice or a legal opinion, and it is recommended that the reader seek independent counsel for any specific issue.