BiggerPockets

I own some rentals in blue collar areas. Some houses are notorious for being occupied for 3 months no issues, then late payments, then partial payments, then no payments, and eviction. They cash flow excellently when rented, so I do not want to get rid of them and I have trouble finding Section 8 tenants for these units.

What I am thinking is, have my property manager get their credit card number when they sign their lease. Have her download an app such as squareup (https://squareup.com/). Have a clause in their lease that states something like "On the 6th day of the month, if the rent has not been paid, the tenant agrees to have their credit card charged for the total rent amount, plus a $50 late fee, as well as any credit card processing charges." This will guarantee payment.

Payments charged would be something like this..

Rent - $450
Late Fee - $50
Credit card fee (2.75%) - $13.75
Total charged - $513.75

Has anyone tried anything like this? Is it entirely legal? Pros/Cons?

Lets assume this can be done legally (not sure why not, but law does not follow logic).

You would increase your odds of collecting rent, not garauntee it. If they are not paying rent on time, chances are they don't have much available credit if any.

But in all, it sounds like a good idea. Shoot, why not let them pay on-time rent with the credit card if they are willing to pay the processing fee? Maybe you could charge another $15 concenience fee - just have to make sure you are in compliance with usery laws and maybe others.

I bought an item from a merchant who had the Square-Up app. That is a pretty slick deal. It works best when doing transactions with other people who have a smart phone so you can email the reciept to them while they are standing there and they can get it before leaving.

@Chris - No merchant account would be needed if I am understanding the app correctly. Just the payment of the fees, which would be billed to the tenant. From some basic research, the fee's for using square are a bit higher than you would get if you had a merchant account, so that must be the rub.

Good thought about them canceling their car. Maybe a lease stipulation will be that by canceling their credit card, they effectively cancel their lease, voluntarily? That could be another good out to prevent having to go through eviction hearings.

@Brian - I agree, sometimes the law does not follow logic. That's why I am a bit hesitant to proceed and looking to others for some guidance on the issue.

If using the app worked out well, I would consider offering regular payment as an option, but I doubt people would want to pay the convenience fee, as most of these tenants live paycheck to paycheck. $15 per mo can be a huge deal for them. Plus I kind of like the idea of only doing it when they are late, charging all of the extra fees so it stings quite their wallet quite a bit. This way they will remember what happens when they pay late and correct their actions.

@ Nathan, I was thinking the same thing as a potential flaw in my strategy. Going forward I would require one to be put on file. I wondered about the legality of doing that, but most hotels and car rental places demand a credit card for incidentals, so I think I would be good as far as tenant screening.

@ Anthony, after a bit of digging, I found the square app can have manually entered credit card numbers, but they charge a higher rate. This will be taken into account upon invoicing so it won't affect me so much.

I had not thought of using the card to invoice for incidentals, but that is a great idea as well! I have only gotten burned once with a terrible move out, but it certainly was painful enough. A credit card will be very useful in this situation, if worded correctly in the lease.

To capture everything suggested thus far, I am thinking something like this to be added to the lease, "On the 6th day of the month, if the rent has not been paid, the tenant agrees to have their credit card charged for the total rent amount, plus a $50 late fee, as well as any credit card processing charges. If at any point, the tenant has canceled their above listed credit card, this will be interpreted as voluntarily ending the lease, effective the date of cancellation. Upon move-out, should any damages exceed the amount of the security deposit, the tenant agrees to have their credit card charged for the balance owed on the damages."

What do you guys think?

The more I think about this, the more it sounds like a good option rather than a requirement. I don't know what rental rates are in your area, but I charge 550 for my one SFR (discounted from market rate of 600 so I have a broader pool and can be more selective) and don't expect anybody that ever rents from me to even qualify for a credit card. In fact, I am on my first tenants, and out of all my applicants, I don't believe a single one of them would have qualified for a credit card unless it was prepaid.

Debit cards can usually be used as credit cards and if there is not enough money in the account the banks sometimes allow the overdraft and charge fees. This could work for your tenant depending on what your late fees are and what their bank's fees are, but it is an option to get your money.

I have no idea if this is legal, but it sounds like a great idea! Let us know what you find out. My suspicion is that it may vary by state.

The progression from partial payments to late payments is characteristic of D class properties. That is the nature of the beast for more cash flow. What gets brushed under the rug in the 50% rule discussions is the collection loss and economic vacancy when people purchase properties that cash flow with low amounts of dollars invested.

@Terri Pour-Rastegar It's nice to hear that your collections are pristine. But you can't screen for future problems. In 2011, my company's 'root cause' for evictions and abandonments were job loss, health related, and domestics (divorce, separation, etc.) in that order.

I'd like to know how you can tell, when a tenant signs your lease, that that tenant won't lose their job or they won't suffer a heart attack.

Not paying rent is never an excuse unless they just don't have any money or the means to pay. DD doesn't work if there isn't any money in the account. Do you screen to see if they have credit cards (or 401K, pension, car maybe?, etc.), or just a checking account?

For self managed property, our tenants can pay at WalMart for $0.88, and we'll pick up the $0.88 fee. But this option, again, requires funds currently available. Credit cards and borrowed funds (payday lenders, etc) sometines work if the tenant gets a new job or disability pay.

I think many good people had a tough go of it in the last few years. How you could have screened for people losing their jobs is a mystery to me too. Charging folks on their credit card for a small premium to cover the fees would have extended the tenure of some of my tenants, but we would have lost them eventually anyway due to prolonged unemployment.

Getting a larger security deposit will make getting a tenant harder. Getting a credit card to charge where the tenant covers the fee may be easier. If they cancel the card it won't help much though.