As an independent landlord, you might not have given much thought to how you collect rent. As long as it gets paid, why should it matter whether it comes in by cheque, Venmo, or some other source?
But the way your tenants pay can actually make a big difference to your bottom line. The most common methods of collecting rent take too many steps, carry too much potential for errors and take too long.
Making rent payments easier for the tenant helps them stay on track. Automating processes prevents delays caused by human error and using direct payments gets the money to your account faster. Keep reading to find out how collecting rent online does just that and can increase your profit margins.
What are the Different Ways to Collect Rent Payment?
For landlords, there are many payment methods you can use when collecting rent from your tenants, ranging from checks to property management software.
Let’s take a look at the many ways landlords can collect rent from their tenants or clients.
Personal Checks
Everyone who has ever rented a home has probably paid their rent by check at some point in time. Checks are affordable and can be post-dated, so you can collect a year’s worth at a time. You can use your mobile banking app to deposit them with your phone, so you don’t have to leave the house.
However, checks also require a fair amount of manual effort on the landlord’s part. Checks need to be physically collected and deposited. Once a check goes to the bank, it can take days to clear. It’s up to you to go back and make sure the check hasn’t bounced. Checks also need to have the correct amount, contain the tenant’s signature, and date, all of which can interfere with a check’s clearance if incorrect.
If a check does bounce, you can be charged a fee by your bank. You may then need to start the process all over again.
Cashier’s Checks and Money Orders
A step up from the personal check, cashier’s checks, and money orders are guaranteed to clear because your tenant has to provide the funds before they can get the check.
The reduced uncertainty about whether a check will clear makes your job easier, but there are drawbacks to this method as well.
Because your tenant has to pay the full amount in advance to get a money order, they’ll have to remember to go to the bank every month and physically give you the check, potentially causing delays. And the extra expense and hassle for them could discourage them from staying when their lease is up.
Venmo and Other Mobile Payment Apps
Venmo is convenient for landlords and tenants alike. You’ll get a notification right away when the rent is paid, and you’ll have immediate access to the money in your Venmo account.
These apps also add an extra step for you, since you have to manually transfer the money to your bank before you can use it.
The downside to apps like Venmo is that they still add an extra step for the tenant to pay their rent. Before they can transfer money to you, they have to transfer it into the app, a process that can take a couple of days and potentially cause a late payment.
However, Venmo explicitly prohibits business transactions and commercial payments and made a policy change last July and has since added a fee of 1.90%. That’s not good for tenants or landlords.
Direct payment
Direct payments, also known as Automated Clearing House or “ACH” payments, use a pre-authorization to transfer funds directly from the tenant’s bank account to yours.
They can be set up in advance to initiate payments on the first of every month, and there are services that can automate reminders, receipts, and tracking for direct payments.
Of all the methods, direct payments get the rent into your bank account fastest and with the least legwork for you and the tenant.
Tenant Management Software
As you can see, most of the common methods of rent collection require a few extra steps for both the tenant and the landlord. These steps often take a few days and have to be repeated if there is a problem.
Even the best tenants will occasionally bounce a check, and it can potentially take weeks to get everything sorted out when that happens.
To combat this, many independent landlords use software to collect rent online. These online services automate most of the process, including:
- Collecting payment information from tenants. Rent collection services offer tenants a secure portal to provide their payment information and make changes if necessary. Tenants also have the option to set up autopay.
- Invoicing and reminders. The best online rent collection software automatically sends reminders to tenants a few days before the rent is due, giving them time to make sure they have the money ready to go.
- Transferring money. The most important part of the process, rent collection software oversees the transfer of money from the tenant’s bank account into your hands. The best online rent payment services integrate directly with your bank account, so you have full access to your money as quickly as possible.
- Following up on overdue payments. Good rent collection software automatically notices when rent goes unpaid, alerting the landlord and sending automatic follow-up reminders to the tenant. It also has the ability to charge predetermined late fees.
Most of the available rent collection software solutions charge a nominal fee to process the payment and give landlords and property managers the option to pass fees along to the tenant.
Why Collect Rent Online?
The traditional methods of rent payment cost you money because they have multiple steps that slow down the process, introduce opportunities for mistakes to be made, and carry an increased risk of fraud.
Take checks, for example. To collect rent by check, the tenant has to get a checkbook from their bank, write a check for the correct amount, remember to sign and date it, give the check to you, and make sure the money is available in their bank account.
You then have to endorse the check, deposit it in your account, wait up to a week for the check to clear, and manually confirm that the payment has gone through.
In the best-case scenario, money paid with a check is available for use in your account around the 5th of the month. If any one of the involved steps goes wrong, that timeline is pushed out.
As they say, time is money. The longer it takes money to get from your tenant to your bank account, the longer you have to operate without it. As a real estate owner, you have obligations to meet whether the rent is paid or not. When rent payments are delayed, payment options all come with a cost.
If you use savings, that money becomes unavailable for other investments. If you borrow through financing or mortgages, you will have to pay interest. If you fall behind on your own accounts, you risk doing damage to your credit score which can translate to higher mortgage rates and reduced borrowing opportunities down the road.
Collecting recurring payments for rent online removes the manual work for both parties, speeding up the process and reducing the potential for errors.
When collecting rent online, the tenant can provide their information once and agree to set up automatic withdrawals, the software initiates the transfer every month, a direct payment can be cleared for use in your bank account in as little as one business day, and the software will make sure everything has gone as it should. Plus it’s safer than traditional methods because there’s no way for money to go missing and everyone’s banking information is kept secure.
Additionally, the software can provide you with rental property analytics that can help you understand your performance. It’s easier for everybody and has the potential to save you a lot of time and money.
Online rent collection is beneficial for the tenant as well. Recent research by McKinsey shows that the number of Americans using online payments was up 12 percentage points in 2021 and trust in digital payments continues to build. What’s more, by simplifying the process and helping your tenants stay organized, they’ll save on late fees and even have the chance to improve their credit score.
Easily Manage Your Rental Properties
In addition to saving time and money by automating rent collection, you can take it a step further by automating all your rental property accounting.
Independent landlords spend a lot of time doing things like documenting expenses and reconciling accounts. And by doing so manually, they tend to miss things that can be deducted on their Schedule E at tax time.
Using rental management software that connects with your bank account to automate your rental property accounting can save you time, effort, and money, too.
Final Thoughts
When you’re a small landlord, time and money can both be scarce. Using outdated methods of rent collection makes the problem worse when it doesn’t have to be. When you use property management software to automate rent collection, you reduce the number of steps required for the rent to be paid, reduce errors, and get paid sooner – which translates to more money in your account, faster.
FAQ
There are dozens of companies out there offering online rent collection as a service. Each has different strengths and weaknesses, but we recommend looking for a few key features.
The best software for online rent collection gives tenants flexibility in the way they pay, sends reminders automatically, uses 256-bit bank-level SSL encryption to keep payments secure, and gives you instant notifications when the rent is paid. Most importantly, choose online rent collection software that lets you easily add rent increases for lease renewals and integrates tightly with your banking and accounting so that as much of the process can be automated as possible.
There are two components to the cost of collecting rent online: the cost of the service itself, and the money you save by gaining access to rent payments sooner.
Even with paid services, which range from a few dollars to 1% of the rent amount to process rent payment, the cost is more than recouped by avoiding borrowing and late payments. Baselane doesn’t charge landlords or tenants any fees to pay rent online, except when tenants choose to pay by credit card.
Venmo and other money transfer apps are excellent products that make it easy to pay for things online, but they don’t have landlord-specific features that are necessary for online rent collection, nor are they free to use.
Most importantly, payments only go from the tenant’s virtual wallet to yours – so you’ll still need to manually transfer the money to your bank account after it’s paid. Online rent collection software oversees the process from beginning to end, automating everything and getting the rent into your account faster.
