Options for Collecting Rent

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It doesn’t seem like that long ago I was writing checks at grocery stores and malls. But if you’re like me now, you hate getting stuck behind the person who whips out the checkbook to buy cat food instead of using a debit card.
Times have changed since the debit card and most people rarely write checks for anything. In fact, I was shocked while doing my taxes and realized last year I wrote less than 10 checks total!
The internet and banking technology is doing the same thing to rent checks that debit cards did for retailers, changing the way we do business. Now you have a seemingly limitless abundance of choices as a landlord to avoid some of the inconveniences of collecting rent checks. But with so many options, how do you chose the best? And is what works best for you, the landlord, going to be the best solution for the tenant? The answers might surprise you when you dig into the pros and cons of the choices you have to collect rent.

Cash

Cash is king so I can’t imagine many landlords turning it down, but there are some obvious downsides. I’d never want someone to leave cash in my mail box so for me the biggest inconvenience of accepting cash is meeting up with a tenant every month to collect.
If you do accept cash, just remember to always, always, always provide a receipt. It wasn’t too long ago I read a news story out of Pennsylvania where a tenant won several lawsuits by suing landlords for security deposits after they provided cash with no receipts, unfortunately costing the landlords a hard lesson learned.
For the non-professional landlord that operates out of your home and not a rental office, cash is the most inconvenient and inefficient method of collecting rent.

Personal Check

The upside to accepting a check is the easy accounting when it clears the bank and creates and instant record of payment. The downside is everything else. Bounced checks, stopped payments and bank fees are enough reason for me to try and avoid collecting personal checks whenever possible.

PayPal

Personally, I’m a fan of PayPal. It’s fairly easy to set up an account and a lot of people already have accounts because of sites like eBay. If both the landlord and tenant have PayPal accounts payments can be sent by simply entering the payee’s email address. You can automate payments monthly and the fees or very low, or free depending on your interpretation of “sending money to friends.”
The downside is the fees can be higher than a lot of other electronic payment options depending on the type of account you have. For a merchant account the cost is $30/month plus transaction fees around 2%.

Credit Card

If you have a financially savvy tenant, this might be a great option for them. With rewards cards, they can rack up all kinds of perks and points paying larger monthly bills like the rent.
The downside for landlords is the fees that comes with processing credit cards. And unless you have a number of tenants that pay with credit cards, I can’t imagine going through the trouble of setting up merchant accounts for one or two tenants. As the “merchant” the landlord is also responsible to pay the higher transaction fees on Discover and American Express cards.
Lastly, the biggest downside to accepting credit cards for me is the dreaded chargeback. This is when the payee disputes a charge and reverses the payment to get refunded. Now we process thousands of credit card transactions at RentPrep each month and only have to deal with chargebacks every so often, but they’re a giant pain when they do happen. During the period when the chargeback is under review by the bank or merchant processor you will loss access to the funds. You’re given only several days to formally respond to the chargeback and unless you have rock solid documentation, you’ll likely lose the battle and the money.

Bill Pay or Electronic Deposit

This is usually a nice easy way to go if you set up some quick and easy guidelines from the start.  Bill Pay is now available through most online banking accounts. It allows the tenant to create a payment account for the landlord and send bank checks via mail. So the landlord will receive a check just as if the tenants wrote out a personal check and mailed it. The convenience is really for the tenants who can automate the payments monthly, just be sure they’re set a few days before it’s actually due since it typically takes 3 to 5 days for the checks to be received from the dates they were entered.
Electronic Deposit is awesome for landlords if they have separate bank accounts for each property. Since you have to give the tenant your bank account number I would not recommend sharing your personal account obviously. But in terms of cost, speed and convenience, this is the landlord’s best option in my opinion. Transfers are usually made immediately and based on the tenant’s available balance, so there is no chance of bounced or returned payments. Also, the tenant carries any fees associated with transaction.

Industry Tools like Dwolla and Spark Rent

I can name a dozen sites that specifically market to the rental industry and offer landlords a way to collect rent electronically, but for the sake of space and simplicity I’ll dissect two of the top brands. And since most of the options are fundamentally the same, you should get a good feeling if this method is right for you by understanding how it works.
Dwolla has been around awhile and just recently started becoming popular among landlords. Its premise, like most online payment services, is to easily send money using an email address, phone numbers, LinkedIn, and Twitter. This is great for the landlord who doesn’t want to share bank account numbers.
Once the landlord sets up an account, and the tenant sets up theirs, money can be transferred for only a 25 cent transaction fee that can be paid by either party. Aside from the very low transaction fee, another nice feature for landlords is free transfers from your Dwolla account to your bank account. These can take 1-4 business days, but transactions from Dwolla to Dwolla accounts is instant.
Spark Rent is much like Dwolla in that both the landlord and tenant creates an account to electronically send money with low transaction fees. The biggest notable difference from Dwolla is the slightly higher transaction fees at $1 per transaction, and slightly longer transfer time at 3-5 business days.
All in all, it’s an exciting time for landlords when it comes to collecting the rent because there are so many options that make it convenient for both sides to exchange funds. The varieties of rent collection methods also protects landlords in ensuring that they have up-to-the-minute information on when funds are transferred and when they are officially late. Now you just need to choose the method that works best for your rental properties.
What method do you use to collect rent? Why does it work for you and are you thinking of changing? Please share this article and let us know your opinions in the comments section below: