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As a first-time real estate investor or new property manager, you are responsible for choosing which rent collection method(s) you'll offer your tenants. Automatic rent collection is increasingly popular among landlords and tenants alike, but it often comes with questions and concerns from both parties.
If you're thinking of offering automatic payments to your tenants, there are a few things you need to know first. In this article, we'll review the benefits of autopay for rent collection as well as six key points to know before getting started.
Related: How Successful Landlords Approach Rent Collection
Benefits of automated rent collection
Automated rent collection, often facilitated by a bank or property management software platform, is a method of rent collection that automatically transfers funds from your tenant's account to yours each month.
Autopay differs slightly from online bill pay, which you may also be familiar with. The key difference with online bill pay is that a tenant gives permission for their bank to make recurring payments from their account to the landlords'. Autopay, on the other hand, is when the tenant permits the landlord to debit their account each month.
Autopay is an excellent way to manage regular payments in the same amount each month, like rent. Other benefits of automated rent collection include:
Guaranteed on-time payments
Fewer late fees for tenants
Peace of mind if there is no rent grace period
Less stress on the first of the month for both parties
What landlords need to know about automatic rent payments
Before you get started with autopay, however, there are a few important things to know. Keep each of the following six tips in mind before implementing your automatic rent collection system:
1. You should include an autopay clause in your lease agreements
It's important that you establish all your rental policies and expectations in the lease or rental agreement, including payment options and requirements. In every lease, explain in detail the options tenants have for rent payment, including autopay. Be sure to also include a description of how autopay works through your property management software or other platforms, as tenants will likely have varying levels of literacy with technology.
Related: 5 Property Management Tasks to Automate in 2023
2. Don't require tenants to use autopay (or electronic payments)
This is one of the primary causes of legal issues regarding rent payments for landlords. In certain states (such as California), it's illegal to require tenants to pay rent electronically. In these states, you'll need to provide at least one offline method for rent payments, such as cash or check. The same applies to autopay — whether or not you can require tenants to set up autopay depends on which state your property is located in. It's important to know which state and local laws apply so that you can provide tenants with multiple options to pay rent when necessary.
3. Be aware of fair housing regulations
Even in states that don't specifically forbid it, requiring tenants to set up and use autopay could be interpreted as a violation of fair housing laws. In some states where tenants are protected against discrimination based on age, a policy requiring tenants to pay via automatic payments may be seen as discriminatory against older renters, who are less likely to be digitally literate.
If you have older tenants, an online-only policy could induce unnecessary stress or even motivate them to find a new rental. Use caution when developing your rental payment policy, and be cognizant of how your leases uphold fair housing laws.
4. Be sure you can reject automated payments
No matter which method of rent collection you use, you must have a way to reject payments. This is important because in some states, accepting full or partial payments during the eviction process could delay the legal action and require you to file an entirely new complaint. For this reason, it's critical that you are able to reject an automatic rent payment and stop autopay altogether when necessary, such as when the lease ends.
5. Learn about NACHA rules and regulations
The National Automated Clearinghouse Association (NACHA) is responsible for regulating the ACH network and ensuring its security. For example, NACHA requires merchants (like landlords) to have a written security policy explaining how tenant information is stored. These rules ensure the integrity and confidentiality of sensitive information and are critical whenever you're dealing with tenant data. Be sure your payment processor is NACHA-compliant before implementing your autopay policy.
Related: ACH Payments: What Are They and How Do They Work?
6. Watch out for cases of non-sufficient funds
Just because a tenant has enabled autopay, this does not mean their payments are 100% guaranteed. If a tenant does not have enough funds in their account to cover the debit, the payment will bounce and you won't receive the rental amount on time. In many states, landlords can charge a service fee when this happens, but be sure you know how much you can legally charge based on your state.
Automated rental payments are a benefit to both landlords and tenants but are typically accompanied by a learning curve. Be sure you're aware of these six points to prepare for a smooth integration of this rent collection method.
