As a landlord, rental payments are the core of your business model. How you accept rent payments will shape the experience of your tenants and their ability to pay you on time. Traditionally, rent payments were paid in cash or check, delivered directly to the landlord in person or by certified mail. However, times have changed. Many new landlords and real estate investors may find themselves seeking the best methods or system to handle rent with their tenants, and the best policies for situations like roommates and late payments.
At Prisma, we’ve got the operations of being a landlord all hammered out. Let us be your guide through the essentials of rental payments and tenant rent management.
Everything You Need to Know About Setting Up Rent Payments
Setting up rent payments does not have just one best answer. You are establishing a system by which your tenants will be able to pay rent. You get to determine how much effort it takes to pay rent and what your policies are for failing to meet those standards.
We’ll cover everything you need to know about building your rent payments system and how to accept rent payments from your tenants.
How to Set a Competitive Rent Rate
There are three ways to determine the rental rate you should charge. The first is based on your local neighborhood rents already in place. The second is to use a rough estimate of 1% of the home’s value per month. The third considers what locals can afford based on an income ratio.
Determine the Competitive Rent Rate for Your Neighborhood
The most competitive way to target your rent rate is to follow the market. Look at similar homes in your neighborhood and take a range of their rental prices. Mark the lowest rent price and the highest, and aim to be somewhere in between. Use comparison to gauge if the market would consider your home in the lower, middle, or upper range of the local rental market.
1% of the Home’s Value per Month
The second method is to charge about 1% of the home’s market value. Therefore, a $250,000 home might bring in $2,500 monthly rent.
What Local Families Can Afford
The third method to consider, especially as families deal with inflation, is what local tenants can afford. Take the average household income in your neighborhood and region and divide the monthly amount by 1/4 to 1/3. That is the range that locals can afford to pay rent.
Within these methods, you will find the balance of profitable and competitive. Set your rent slightly lower to attract more potential tenants while maintaining a profitable margin.
Pro Tip: Don’t forget to set aside 1% of the home’s value per year for repairs. Allow anything not spent on yearly maintenance to build into a roof and HVAC replacement fund.
How to Accept Rent Payments
You can accept rent payment on paper or through the payment card system. On paper payments include cash, personal check, and money orders. Digital rent payment includes debit cards, credit cards, and ACH payments.
Accepting Rent On Paper
Traditionally, landlords accept rent on paper. Cash in an envelope, a personal check, or a money order could be accepted for monthly rent. However, for this to happen, tenants need to meet you in person or send the check in the mail. Mailing rent has always been a problem that results in late payments completely outside the control of your tenants, while in-person demands have become much less viable in recent years.
In addition, except for certain old-school institutions like rent and some government offices, most people don’t carry cash or even have a checkbook anymore.
Accepting Rent by Card
Accepting rent through credit and debit cards is more adaptive to the modern lifestyle for families at every socioeconomic level. Paying rent on time and automatically is easier without mailing a check. Having a card is the safest way to handle money, which means that all vendors should seek to accept payment cards.
ACH Direct Rent Payment
ACH payments are direct deposits from one bank to another. With the right digital infrastructure, you can allow your tenants to pay directly from their bank and automate payments without an intermediate card.
However, you may quickly learn that this requires payment processing, a fee-based service that needs a secure system to facilitate. Whether you accept card payments in the rental office, online card payments, or both, you will need a more complete structure than is required to cash a paper check.
How to Accept Online Rent
As a modern landlord, you likely already know that online rent payments are both your tenant’s preferred method to pay and the best way to ensure you get paid on time every month. Most people will automate their rent payments directly from their bank and never miss a payment, if given the tools to do so.
So, what do you need to accept rent payments online? If you were building the solution from scratch, you would need a website with a tenant portal, account management and rent payment features for each of your tenants, and a payment processor to handle the card transactions.
Fortunately, you don’t have to start from scratch. Platforms like Prisma provide the tools and tenant portal structure you need to start accepting debit, credit, and ACH rent payments online immediately. The platform is already paired with payment processing. While tenants pay the card processing fee, Prisma’s credit and debit fees are among the lowest you’ll find in property management software.
With your tenant portal established, you can offer your tenants a way to easily automate online rent payments.
How to Split the Rent for Roommate Tenants
Landlords are often asked by roommates if they can split the rent, thus simplifying roommate politics and responsibilities. This is a fine idea, in theory, but comes with some special concerns for landlords. First, if handling your rent payments digitally, can your tenant portal do that? If you’re using Prisma, then the answer is yes.
You can help roommates split up the rent in two or more pieces and handle each of their rental histories separately based on reliable payments.
What to Do if Split Rent is Half Paid?
Good question. Rent splitting is a risk for landlords because it complicates the matter of tenants paying vs staying. However, there are several tools you can use to reduce that risk and offer more flexibility to your tenants.
If you are handling all finances separately, be sure to use separate leases so that you can more easily evict just one tenant. This can also be used to protect good tenants from a friend who may be taking advantage of the situation.
Prisma provides an option for split rent, but requires that all parts of a split rent be set up with recurring payments. If all tenant roommates are willing to automate their rent, then splitting has the minimum amount of risk.
Best Practices for Late Rent
Every landlord eventually must deal with late rent. Rent that is a few days late is very common. Delays happen, things come up, and paychecks come in late. Regular late rental payments may be a problem, but occasional delays do not necessarily mark a bad tenant.
So, how can you handle late rent in a way that is fair for people with mishaps, but tough on the reckless and irresponsible? A few late rent best practices will keep your tenant management style compassionate yet effective.
Include a Staged Late Fee in the Lease
The best kind of late fee for rent is one that stages up over time. Grace periods tend to result in habitually late rent, but a scaling late fee can be forgiving to those who come in a day or two late but more strict with a week late and longer. This also gives you a framework to begin the eviction process after rent that is not paid up in a month and more.
Be sure to write all your late fee structure into the lease signed by each tenant to lay the legal groundwork for fair and unwavering enforcement.
Create a Channel of Communication
Make sure your tenants can talk to you. If rent is late by more than a few days, consider reaching out by email to ask if everything is alright. You may choose to provide a grace period if tenants are experiencing tragedy, and this is your ideal moment to refer tenants to rent assistance programs if they are struggling financially.
Provide a One Month Warning Period
Give tenants at least one full month before beginning the eviction process. Send and post warnings to let your tenant know that their home security is at risk and you will be forced to evict them without payment. Give ways to reach you and stay by the phone or email inbox. This is your tenant’s chance to reach out and ask for help, an extension, or more peacefully arrange for their departure.
Post a Pay or Quit Notice and Alert Your Lawyer
Finally, post your Pay or Quit Notice and then get in touch with your real estate lawyer. They will help you prepare the first steps to evict your tenant. However, eviction takes some time, so your tenants still have a few weeks or months to either pay or offer to leave.
How to Handle Bounced Checks
If you are paid by paper check and then the bank rejects that check, notify your tenant. Let them know that the check bounced and that their rent is now late. If they offer to write you another check and you don’t trust it, you can ask to receive rent by certified check or money order, which assures payment.
Notify your tenant in writing, include a scan of the check, and make sure the communication is recorded in case this is the beginning of an eviction proceeding.
You will want to place a policy regarding bounced checks into your lease. Let tenants know the policy on reinstated late fees after a check bounces, if there are additional fees for a bounced check, and if you require a certified check to replace a bounced one.
Security Deposits vs Last Month’s Rent
Lastly, we want to clear up a common confusion regarding last month’s rent. A security deposit cannot legally be used to cover last month’s rent, even if tenants leave for non-payment.
A landlord can choose to ask for first month’s rent and the security deposit or ask for the first and last month’s rent with the security deposit. If the tenant pays last month’s rent upfront, they don’t have to worry about their final rent payment while making arrangements to move. It also protects landlords if tenants leave without paying their last month, and may cover the last month if tenants must leave for non-payment.
However, the security deposit is a legally protected agreement between landlords and tenants. If the home is in good condition and repairs are not needed, they get the full security deposit back. They may receive a partial security deposit, but only if deductions are paired (on demand) with an itemized list of costs that must align with any move-in and move-out inspections and photos.
Handle Online Rent Payments Easily with Prisma
Providing your tenants the option to pay their rent online is one of the best ways you can help them stay in 100% good standing. Automated payments are always on time, and online payments are rarely delayed. With Prisma, you can set up a tenant portal and begin accepting online rent payments immediately without paying the processing fee. Paired with the many other property management, document, and tenant screening tools available, Prisma seeks to be your one-stop for everything the modern landlord needs.
