Part 1 of this two-part post on collecting rent can be read here.  Previously, we discussed the possibilities of using a lockbox, requiring the tenants to mail their rent payments, or requiring the tenants to make an in-person deposit into the landlord’s bank account.  This post covers a couple of additional options that are a bit more modern and less problematic.

Collecting Rent Via Electronic Payment

Landlords are starting to use electronic payments, aka ACH (automated clearing house) payments, more and more often.  There are a number of electronic payment services out there where tenants can pay their monthly rent to the landlord online.  (Properly offers an electronic payment service, for example.)  Some services allow the landlord to automatically send an invoice on or before the due date as a reminder to the tenant of the amount owed.  Some services even automatically calculate and apply a late fee.

All of them operate in the same basic way, though.  The tenant initiates a payment from the tenant’s bank account to the landlord’s bank account.  It can be a one-time transfer or an automatic recurring transfer.  Alternatively, the tenant could authorize the landlord’s bank to initiate the transfer.  No matter who initiates the transfer, money magically ports from the tenant’s bank account to the landlord’s, without any checks having to be written or delivered anywhere.

This is a great option, I will admit.  I like the potential for automation, because the more you can automate the process, the less likely it is that the tenant, bank, or post office will goof it up.

There are just a few reasons why I’m not super crazy about ACH payments.  One is that the processing time is sometimes really slow.  There are a number of services that will do ACH transfers for free, but many of them take the tenant’s money into their own account, sit on the payment for a few days to make sure it will clear, and then transfer it to the landlord.  (The interest earned by the intermediary is probably the reason they can afford to provide the service for free.)  So the landlord might not get the payment for 3–5 days, or possibly even longer.  If rent is due by the 1st, but you wait until the 3rd before imposing a late fee, and then you have to wait another 3–5 business days after that to see if the payment will actually clear, you’re waiting a long time before you know if you’ve got a good payment from the tenant.

I’ve had someone tell me that the waiting time for ACH is similar to the waiting time for depositing a check.  I think this is a good argument.  But there’s still a difference, because if your tenants bank locally, a check normally clears in just 1-2 days.  Also, once a check clears, it’s cleared, and I don’t think there’s a way to reverse it unless they can prove that it was fraudulently cashed.  By contract, ACH payments can be reversed by the other party for quite a while after the payment is sent through.

Any time there’s a middle-man between you and your tenant paying the rent, you risk having the tenant blame the middle-man for the nonpayment of rent.  The ACH system seems pretty transparent and reliable, but if a tenant tried to claim that there was no problem on their end, I wouldn’t want to have to try to navigate the phone calls or emails necessary to prove that the payment failed because of the tenant’s fault.

Lastly, and this is something I didn’t discover until I was writing this post, California law requires that a landlord give a tenant an option to pay rent that is not by way of electronic deposit.  Take a look at Civil Code 1947.3(a)(1).  Well, shoot.  That makes things really complicated.

Collecting Rent Via ATM Deposit-Only Cards

I think I found a solution that will fix all of those problems.  I talked to my bank and asked if they would issue deposit-only ATM cards.  A deposit-only ATM card is exactly what it sounds like: an ATM card that only works for deposits, not withdrawals.  My family had one many years ago for our resident manager to used to deposit the rents for us in our 22-unit apartment building, and it worked flawlessly.  I had the idea that, if my bank would allow it, I could have one of these cards issued to each tenant in the fourplex, and they could use it to deposit their own rent each month.

I bank at Bank of America, so I can’t speak for all banks, but when I asked if they could give me a deposit-only ATM card, they said yes.  They only do it for business accounts, so I had to open a business account with the bank, but that didn’t take very long to do.

I asked how many cards they would give me, and they asked how many I wanted.  I said four.  They said no problem.  Sweet!  I went into the bank and had them order the cards.  For the names on the cards, I just had them print one that said “Apartment A,” and one each for apartments B, C, and D.  That way, if these tenants move, I can just use the card for the next guy.  I set the pin at 1111 for all of them, since nobody is going to steal the card and be sneaky about depositing more money in my account.

One of the criticisms I’ve heard about using a deposit-only ATM card is that it gives the tenant the practical ability to make partial payments whenever they like.  If a landlord gives a tenant a 3-day notice to pay or quit, and a tenant makes a partial payment, even of a small amount like $10, that can force the landlord to issue a new 3-day notice before proceeding to eviction.  It’s a dumb rule in my opinion, but it’s the law.  That’s why some landlords are concerned that if the tenant has the power to deposit a small amount of money whenever he/she wants, the tenant could end up halting their own eviction by depositing a partial payment every few days.

Here’s the thing, though: the law isn’t totally blind to reality.  Just because the tenant has the actual ability to make the payments doesn’t mean they’re legally permitted to.  If the landlord returns the tenant’s funds in a timely manner, the landlord should still be able to proceed with an eviction.  Imagine your tenant mails you a check even though you said you wouldn’t accept payments other than the full amount owed.  The receipt of the check in your mailbox doesn’t obligate you to accept it.  The same goes if the tenant slides an envelope with some cash under your door.  Whether or not the funds are good, if the 3-day period for the tenant to pay rent has passed, or if the tenant is trying to make only a partial payment, the landlord is entitled to return the funds in a timely manner as being refused, and proceed to eviction as planned.

In my case, I wanted to make things just a little more clear.  I included a provision in my lease agreement specifically stating that the tenant is not authorized to make partial payments of rent if a 3-day Notice to Pay Rent or Quit has been issued.  If the tenant makes an unauthorized payment, I can return it to the tenant within 10 business days without prejudicing my rights in an eviction action.  Because the tenant has signed and agreed to these terms in advance, I think that adds a significant amount of strength to my case.

Other benefits to using this method of payment:

  • Bank of America ATMs are everywhere, and they’re open 24 hours a day, 7 days a week.  The tenant has literally no excuses for making a late payment.  Not a single one of my tenants complained about the ATM deposit method, and two of them even mentioned that they had Bank of America accounts and/or knew of several convenient locations they could use.
  • Each deposit-only card has a unique card number, so I can tell who deposited the money just by looking at my bank statement.  I also made this easier for myself by having the deposit cards for apartments A and B land in my checking account, while C and D land in my savings account.  B and C have the same rent amounts, but they end up in different accounts, and the other rent amounts are different.  I can tell at a glance whose rent is whose even without consulting the card number.
  • I tested each of the cards in advance to see what the deposit receipt looks like.  The receipt the tenants get shows only the amount deposited and the date and time of deposit, and not my bank account balance.

Conclusion

By using the deposit-only ATM cards, I’ve eliminated the theft/loss problems with the dropbox and mail methods.  If a tenant wants to pay rent in cash, they can, and I don’t have to be there in person to collect it.  I’m not giving out my account number repeatedly, which might tempt a tenant with the thought of setting up electronic payments and stealing my money.  I’m getting the money deposited directly into my account, without requiring a tenant to go to a bank during business hours.  I’m getting the money deposited into my account faster in most cases than the ACH payment method would provide.  Plus, I’m complying with the California law that requires that I give the tenant the ability to make payments by some means other than cash or electronic payment.

Apart from the one potential issue of having a tenant make partial payments of rent to try to defeat an eviction action, which I think I’ve adequately protected against, I really don’t see a downside to this method.  And I don’t know this for sure, but I suspect that if I had initiated an eviction against a tenant, I could probably freeze or cancel their ATM card.

What do you think of my approach for collecting rent payments?