Tips for Landlords: Rent Payment Policy - dummies

Tips for Landlords: Rent Payment Policy

By Robert S. Griswold, Laurence Harmon

Your rental contract should clearly indicate how residents should pay rent: by electronic payment, personal check, cashier’s check, money order, or cash. Regardless of the method, give your residents a receipt for all money received.

Accepting electronic payments

Technology is making the rent collection process much more efficient and timely. Rental owners and property managers can now benefit from their financial institution’s ability to process hundreds of rent payments in a matter of minutes. Due to improvements in software automation and security encryption, which prevents the theft of confidential information, electronic payments are actually more secure than the conventional check payment method.

Several companies now offer technology for the electronic transfer of funds to allow residents to pay their rent. The computer software enables you to download the details on all payments processed each month. You’re automatically notified if a resident has insufficient funds to cover the transfer so you can enforce your regular rent collection policies.

Check with your local Institute of Real Estate Management (IREM) chapter or National Apartment Association (NAA) affiliate for more info on these companies.

Most residents are comfortable paying electronically rather than writing out and mailing a check each month. This method of payment is becoming increasingly popular. With electronic payments, a resident simply fills out a form one time, and the preauthorized amount is deducted on a designated day (usually between the first and fifth of each month) from his bank account and deposited directly into your account.

Going old school with checks and money orders

For many rental property owners, accepting checks (personal, cashier’s, or money order) is routine. Most residents have a personal checking account, and paying by check is easy for them. Check processing has also improved greatly with new federal regulations for the banking industry that allow checks to be scanned and converted to an electronic funds transfer.

Check with your financial institution to see whether you can use this technology to simplify your rent collection, provide immediate access to the funds, and eliminate trips to the bank.

Some landlords request postdated checks in advance from their residents with the idea that they’ll already have the rent payment in hand. It’s never a good idea to accept postdated checks. Often these checks aren’t good, and many state laws consider a postdated check a promissory note. You may be unable to file an eviction action for nonpayment of rent while the note is pending.

Payment by check is conditional. If the check isn’t honored for any reason, it’s as if the resident never paid, and late charges and returned check charges should apply. Check scanning can give you immediate notice that funds aren’t available, allowing you to contact the resident and promptly begin collection efforts.

Never accept second-party checks, such as payroll or government checks. Instead, institute a policy that all rent payments made after the grace period must be in the form of a cashier’s check or money order. The only exception might be if you’re making a reasonable accommodation based on a disability. Then you can accept a third-party check directly from a disability assistance agency, if requested by your resident.

Refusing cash payments, when possible

Although some residents may want to pay rent with cash, avoid accepting it whenever possible. Turning down cash is always difficult, and your residents may remind you that cash is legal tender. However, according to the US Department of the Treasury, you have the legal right to refuse cash because accepting cash

  • Can make you a target for robbery: Even if you use a safe, your risk is increased.

  • Can add the risk of employee theft, if you have employees: Plus, you’re potentially putting your employees in danger.

  • Attracts residents who may be involved in illegal businesses that deal primarily in cash: Although many employees in legitimate businesses derive income, at least partially, from cash tips (wait staff and beauticians, for example), so do drug dealers. Criminal residents don’t want to have their activities tracked and prefer properties where cash payments are allowed. Don’t make your rental property more attractive to the criminally inclined.

Clearly state in your rental contract that you don’t accept cash under any circumstances. Reinforce this policy early in the relationship and don’t accept even small amounts of cash for rental application fees or late charges.

However, if a resident is facing eviction and offers full payment in cash, you may want to accept the funds at a place where you feel safe (your home or office) because you may find that the eviction court isn’t inclined to allow you to terminate the tenancy if you refuse the proposed cash payment for the entire amount due.

Good accounting practices suggest that you clearly document all your income and expenses. The IRS may consider auditing your rental housing if it finds out about frequent cash transactions at your property.