It’s no secret that we’re moving toward a paperless world. From television and social media to shopping and ordering takeout, we are all relying on the internet more than ever. A study by TSYS of 1,000 Americans found that 75% of people would rather pay by card than with paper bills and coins. Another study conducted by ACI Worldwide revealed that Americans are paying 56% of all their bills online. If such a large portion of Americans want to pay for things using paperless methods, why should rent be an exception?
What’s more, online payments aren’t just good for consumers / tenants – they benefit landlords as well. For one, you get your money faster online than you do with paper checks, often even faster than cash. Giving tenants the option to pay rent online also provides you and your tenants with added convenience. No more physical checks, receipts, or money counting; autopay ensures every payment is on time every time; reminders are sent without any intervention; late fees are enforced or avoided; due dates are clearly communicated. The list goes on and on.
Collecting rent online brings significant benefits to landlords and property managers. Still, getting setup can feel like a black box. Fortunately, beginning to accept rent payments online doesn’t need to be overly burdensome or stressful. Let’s review the various online payment and collection methods available to you, the benefits and drawbacks of each, and how you can get setup for easier rent payments.
Types of Online Payment
Let’s start by exploring the three primary online payment methods and the pros and cons of each. You’ll be better equipped to determine which is the best fit for you as you wade into the pool of online collection.
An ACH payment is an automated transfer of funds facilitated by the Automated Clearing House. The Automated Clearing House is a regulated technology that represents a partnership between banks and financial institutions across the US. Debits and credits are collected together in massive batches and transferred between bank accounts all at once. This results in a fast, efficient, and cost-effective way to move money. Commonly referred to as eChecks, ACH payments were originally created as a paperless alternative to written checks.
In order to receive payments in the form of ACH, your tenant must authorize the payment. This requires the tenant’s name, bank name, account number, routing number, and the transfer amount. Their bank account must then be verified before the funds can be transferred from their account to yours, which is done through the ACH Network.
ACH payments are:
- Incredibly inexpensive — ACH payments are one of the least expensive ways to move money because they are not subject to interchange or assessment fees like wires and card payments. This makes them particularly attractive for tenants and landlords.
- Easily automated — ACH payments can easily be automated to run weekly, monthly, yearly, etc. This is a great feature for tenants paying rent regularly. It also means less late payments and healthier cash flow for landlords.
- Highly secure — Because ACH is overseen by NACHA, it has a reputation for being one of the most secure methods of online payment.
- Have longer transfer times — As a result of being processed in large batches, ACH transfers can take a few days to show up in your account. If you’re managing a mortgage, this can make monthly bills challenging.
- Are difficult to access — Traditionally, in order to access the ACH network, you’ll need a relationship with a bank or some other financial institution. This can be costly and require large swaths of your time to set up (although there are ways around this – more below).
- Can bounce — Although it looks a little different, ACH payments can bounce just like paper checks. If a tenant has insufficient funds at the time of the automated payment, the transfer will not go through. You (and your tenant) may not realize this until a few days later when the batch of ACH payments processes.
Credit (or debit) cards are a popular form of rent payment among tenants. Most people already have a card in their name, they are familiar with how credit cards work, and credit cards are quick and convenient to use.
To collect card payments directly yourself, you traditionally must set up merchant services — which can be done through your bank. This gives you access to a merchant account that is between you and the bank that sponsors the credit card. A merchant account is a type of business account that enables you to securely accept credit card payments. The payments occur through your account, and then the merchant services provider processes the payment and transfers the money to your business banking account.
- Are exceptionally convenient — Credit cards are small, offer a person quick access to their funds, enable online payments, and are somewhat safer than cold hard cash, which—if stolen—is gone. It’s no wonder that paying with credit cards is popular among renters.
- Process quickly — Credit card payments tend to process in only 1 – 3 business days, making them quicker than most other online payment types.
- Are attractive to prospective tenants — Because so many people use credit cards, offering the option to pay rent with them could be a selling point for prospective tenants.
Credit cards are associated with:
- Extensive fees — Potential charges include merchant services, interest fees, processing fees, monthly charge minimums, and PCI compliance charges. These fees accumulate quickly and make credit cards an expensive option for rent collection.
- Costly chargebacks — Chargebacks occur when tenants dispute their credit card charges. They can hit your account without warning, and your ability to accept cards may be frozen if you incur too many.
Cryptocurrency is a virtual, internet-based currency. Cryptography secures cryptocurrency, making it nearly impossible to be counterfeit or double-spent. People can use cryptocurrency (or crypto, for short) to purchase goods or services digitally. Because it only exists online, there are no physical coins, cards, or paper that represent any of the cryptos, but people can exchange it for traditional, government-issued currency and vice versa. People also can use crypto for peer-to-peer transactions without relying on third-party interaction from banks or the government.
Although crypto has yet to have a major impact on property management, it is possible for landlords to leverage it as a method of rent collection in the future. Some property managers have already adopted Bitcoin (the most well-known of cryptos) as a form of rent payment. This works when the tenant uses Bitcoin, and the property management software converts the currency to dollars using a digital crypto broker. The landlord then gets the rent payment in dollars. Cryptocurrency is a big topic, so if you’re interested in learning more, check out this article that dives into the impact of cryptocurrency on the real estate market.
The use of cryptocurrency:
- Demonstrates innovation — For landlords with tenants who fit the profile, offering crypto as a payment option denotes innovation and illustrates a commitment to staying up to date with changes in the market and society.
- Fastest and cheapest – Cryptocurrency is known for being exceptionally fast (Bitcoin for examples settles every 8 minutes) and exceptionally inexpensive (many cryptocurrencies are free to transact, others charge minimal fees).
- Is typically untrusted — Many people find crypto’s young history and volatility concerning, which is why it has not been more widely adopted — for rent payment or for other commerce.
- Lacks demand — There isn’t much demand (if any) for crypto as a rent payment option, according to the American Apartment Owners Association.
- Converting Currency is Slow and Expensive – For all the speed and cost efficiency of cryptocurrency, converting your money from crypto to more traditional currency is just as slow and expensive.
Methods of Collecting Rent Online
Now that we’ve gone over the basic types of digital payments, let’s discuss the platforms and providers that facilitate online rent collection. We will break down each method of collection with an overview, an explanation of how to set up each method, and the advantages and drawbacks of each. You’ll be able to assess which method might work best with your business’s unique needs.
Setting Up with Your Bank
The amenities of your bank go beyond personal checking and savings accounts and business banking accounts. Your bank can also provide services and tools that make it possible for you to accept rent payments through ACH and credit card transactions. All you have to do is contact a representative from your bank, ask them about the services they provide, and then let them guide you through the process of setting up the accounts and services that you require.
Collecting rent through your bank is popular among landlords who are setting up online payments for the first time because it is a system with which they are already familiar. However, working exclusively with your bank does present some downsides.
Working exclusively with your bank offers:
- Consolidation of accounts — Working with your bank means that your financial information will be housed all under one roof. You’ll have fewer accounts to manage, fewer passwords to remember, and fewer locations that store the details of your business.
- Increased security — Because banks are built with strong infrastructure and state-of-the-art security technology, you can feel confident in the safety of your information, records, and funds.
- Automated records — Collecting rent through your bank provides you with secure, automatic records of every transaction, which means less bookkeeping for you and the elimination of human error.
Working exclusively with your bank results in:
- Costly services — Merchant services in particular can come at a hefty cost, with fees for set-up, monthly charges, costs per transaction or flat fees, and the cost of any required hardware. There are also fees for each individual credit card and ACH transaction, and credit cards incur higher fees between the two.
- Insubstantial records — While banks may automatically and securely accrue records for you, the records tend to lack detail and are difficult to manage if you have a high number of tenants.
- Lack of control — Your bank will not grant you the ability to compel tenants to make payments, nor will your bank give you the ability to automate payments, enforce late fees, or send reminders through their channels. Payments also process automatically, which introduces issues if you’re trying to evict a tenant. Acceptance of any payment (even partial payments as small as $1) can nullify your right to proceed with the eviction.
Online Bill Pay
Online bill pay is a service that enables users to make secure online payments of their bills. It is tied to the user’s checking account from which funds are withdrawn electronically for payment. Online bill pay enables users to consolidate each of their online accounts used for bill payment to a central location — their bank.
For landlords, this means you can instruct your tenants to pay you rent through online bill pay. You can arrange for them to send you an electronic payment (if you give them your account information), or you can arrange for them to send you a check from their bank.
Because most banks already provide online bill pay as a free service as a part of setting up an account, the majority of your tenants already have access to it. In order for your tenants to set up online bill pay, they must:
- Gather their bills (including account numbers and the addresses where they send payments),
- Enter each biller’s information into their bank’s online bill pay platform,
- Choose when to send the payment,
- Select whether the payment is recurring or should only happen once,
- And set reminders to track when each bill is due.
Online bill pay:
- Reduces late payments — Online bill pay helps reduce late payments with its automated features and organization tools
- Accommodates landlords’ preferences — It gives you the option of instructing your tenants to either send you electronic payments (through the form of ACH) or paper checks, based on your preference.
- Is widely available — Because online bill pay is a free service provided by most banks, your tenants likely have it readily available to them.
Online bill pay:
- Is easily forgotten — Because online bill pay is automated, it is easy for tenants to set it up and then forget about it, which makes it more likely that they will miss bank errors, mistakes, or overdrafts, which could potentially interrupt your cash flow.
- Reduces your control — Depending on the platform that you use to collect tenants’ automated payments, you may experience the same loss of control discussed with working with your bank.
- Requires Hand–Holding – You will likely need to walk your tenants through the setup process and ensure they’ve done it properly. This can result in a lot of additional managemnet – the opposite of your intention!
PayPal, Venmo and Other P2P Platforms
Apps like PayPal and Venmo are growing in popularity. They are quick and simple to use and are meant for P2P (peer-to-peer) transactions. They make it possible for friends to electronically transfer money from one account to the other when they don’t have cash. These platforms provide consumers with intuitive interfaces that are really just ACH payments made easy.
Because P2P apps are so easy to use, they continue to become more common as the world becomes increasingly paperless and cashless. Some landlords have begun using these platforms to collect rent, which requires that they set up business accounts. Tenants and landlords both connect their bank accounts (or cards, depending on the platform), and once the proper accounts are created, they can send and receive rent payments through these platforms.
Using P2P apps is:
- Extremely convenient — Because these P2P platforms are so common, it is likely that your tenants already have accounts and know how to use them. This would likely be a popular method of payment among tenants.
- Trendy — Accepting this form of payment shows that you are up to date with the trends of ecommerce, which might be a selling point for prospective renters.
P2P platforms have some considerable drawbacks. Using P2P apps present:
- Legal concerns — Businesses that wish to use these platforms must set up business accounts. Landlords that use personal accounts to avoid these fees directly violate the platforms’ policy statements and can result in penalties and account suspensions.
- Costly fees — Business accounts incur fees that include a percent of the transaction amount for the interchange, another percent for the merchant bank, an assessment fee, and a dollar amount for every transaction processed. These fees accumulate quickly and lead to a substantial loss of revenue.
- Loss of control — Landlords lose control when using P2P platforms just as they do when working their banks and using online bill pay. The ability to deny payments is a powerful tool for landlords, but landlords lose that capacity when they use these methods of rent collection.
Property Management Software
Property management software enables property managers, owners, and operators to simplify and automate the tasks associated with running their properties. These software platforms usually feature online rent payment, online lease signing, tenant screening, maintenance requests, tenant management, and support and security. They are intended to help all real estate businesses, whether those businesses are commercial or residential, big, or small.
All property management software provides an experience and features that are slightly different from one another, so it is important to assess your specific needs and shop around for the provider that is best for you. Once you find the best fit for your business, setting up online rent collection is pretty simple. Usually, you just have to add your tenants to the system, customize their rent requirements, set the due date, input your account information, and then wait for the payments to appear. Voila! The funds are debited from your tenant’s bank account (through either ACH or credit card payment), processed by the software, and then credited to your account through an ACH payment.
Property management software is beneficial in that it:
- Is cost-effective — Using property management software to process rent transactions diminishes or even eliminates the additional fees that you incur with some methods.
- Provides landlord-specific services — Most property management software platforms make it possible for landlords to prorate rent amounts, set and enforce late fees, create automated payments, and send out reminders to tenants.
- Provides detailed reports — Property management software provides collection reports that go beyond the most basic features of a transaction. You can typically filter the data by the property, date range, invoice type, and more.
- Offers advanced support — You want to look for good support when you are choosing software. When issues arise that require a little additional help, you’ll be grateful to have that assistance from your provider.
- Facilitates quicker transactions — A bonus of some property management software platforms (like Innago) is that they offer express funds delivery. Innago, for example, delivers funds into your account after just one business day.
Property management software can be:
- A drain on resources — If the services that your software provides do not meet your needs yet come at a significant price and require time for training and installation, it can be a waste of time and an inefficient use of your operating budget.
- Time consuming — Shopping around for the best property management software for your business can take a significant amount of time. It can be tricky finding a provider that offers exactly what you need.
Picking the Best Fit for Your Business
It should now be clear that the benefits of collecting rent online are extensive. From the quicker delivery of funds to the added convenience for you and your tenants, online rent collection is a catalyst for the growth of your real estate business.
Although some methods of online collection may, at first blush, seem better than others, it is important to assess the needs of your business and your tenants thoroughly so you can choose the option that will best serve those needs. Making the switch to online collection and providing tenants with the method of payment that you prefer will make the task of rent payment less tedious for you and your tenants. We strongly believe that moving online will improve your business — it’s just a simple matter of figuring out which method will work best for you.