There are negative consequences with collecting rental income through Venmo, PayPal, and direct deposit. I hope you never experience these problems, but I want to educate you on worst case scenarios.
It is important that you treat your rental property management like any other business.
Controlling rent payments
PayPal and Venmo are similar to direct deposit. They allow the tenant to pay at will, which gives the tenant more control. When you have a problematic tenant, you do not want them to be in control.
Here are the major problems that arise when you allow the tenant to be in control:
- Inability to evict non-paying tenants
If you allow the tenant to pay via their own mechanism, then they can deposit partial rent into your account. Unprofessional investors and managers allows this to happen and have a difficult time evicting tenants. By accepting partial rent, you can forego your ability to evict them.
- Clawbacks on the rent paid
If a tenant uses a consumer-friendly method to deposit rent, the consumer-friendly vendor typically takes the side of the customer (i.e. the tenant) in disputes. Therefore, the money can be retracted if the tenant disputes the rent. This typically happens after they move out, especially if they don't agree with your security deposit refund. A reasonable tenant suddenly becomes unreasonable.
- Lease gets automatically renewed
If you do not want to renew a lease, you set yourself up for a difficult court case when you allow the tenant to deposit money at will. By allowing them to use Venmo, PayPal, or direct deposit, you may have already “accepted” next month's rent and are unable to turn over the property sooner.
Now, let's take a deeper dive into each of these three online rent collection methods and real-life examples of what can go wrong.
The problem with direct deposit
I heard a case the other day, which is too unfortunate not to share. An owner sent a 3 day notice to pay rent or quit. After 3 days, the tenant still did not pay. The owner hired an expensive lawyer to take the tenant to court. One day before the court case, the tenant deposited 25% of the total balance due directly into the owner’s bank account (the tenant had the owner’s routing and account number). The owner could not evict the tenant because “partial rent was accepted.” The owner lost the court case and the tenant is living in the property — at a deeply discounted price. The owner not only does not have the full rent, but also had to foot the bill for the lawyer.
The problem with PayPal
First, you leave it up to the tenant to determine the type of payment. If the tenant selects rent as a "goods and services" transaction, then you can incur fees. PayPal also does not make it as easy to automate your process, systematizing the late fees, allowing control over payments, and showing you are professional in the rental industry.
Second, there is a money back guarantee with PayPal. If the customer representative "feels" you have defrauded the customer, then they will give the money back to the customer. Imagine if a tenant calls to argue about the security deposit refund. You are leaving it up to a PayPal representative (who has no property management experience) to determine whether or not to refund the tenant.
The problem with Venmo
It’s free — what’s the catch? Nothing in life is free and cheap alternatives cost you in the end. This is a consumer app. Anyone can pay anyone, and the amount is automatically accepted. The problem is identical to the situation described with accepting direct deposit.
In addition, the tenant can cancel their Venmo transaction before it reaches your bank. As this Money article describes, Venmo should not be used for business transactions. The payment platform was built as a convenient way to pay people you know personally.
One bad tenant can destroy your annual cash flow. Do not let that happen to you. Your only source of income is rent. You do not want to set up your rent collection process to allow the tenant complete control over payments.
Tenants refusing your payment method
During initial interactions with a tenant, he/she may refuse to use your preferred method of rent collection. This type of tenant has always been a red flag to me. They are looking for an unprofessional landlord or manager, where they can make excuses for not paying according to the lease agreement.
It is important that you have a solid tenant screening process and an amicable tenant who wants to work with you. You also want to make sure to work with them, by offering one offline method and one online method (some States require an offline form of payment).
The best ways to collect rent
There is a reason professional property managers and real estate investors request rent through only certain methods. The best methods are a money order (for the full amount due) or an online property management system. If you use an online system, make sure it has the following features:
- Automatic payment scheduling — monthly alerts will reduce the risk of past due payments and help track payments
- Ability to accept only full payments — reduces the risk of partial payment that prevent moving forward with an eviction in many States
- Automatic late fees — reduces the risk of late payments by always sending out late fee notices
- Ability to cancel future payments — if you are starting an eviction, there should be a process in place to cancel the remaining balance of the payment
The #1 issue that I have with landlords and real estate investors is that they don’t treat their rentals like a business. They use existing tools that amplify the risk associated with managing rental properties. Have you ever seen a store clerk tell you that you can pay via Venmo or go to your bank to transfer money into their account? No. There is a reason for this. And, rental properties have even more rules and regulations in the court of law.
Venmo and PayPal are great ways to split dinner bills with friends. They are not great ways to set up a professional and sustaining rental business.