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?
Very interesting idea. I would love to be able to incorporate something like that into a lease. NOT sure how the tenants would react to it though.
But you're right it would almost guarantee payment barring them canceling their credit card. I have tenants who pay late also and this would be a great means to combat that.
Long as all the terms are in the lease and they sign off on it I would thing it is legal.
Only thing you would need is a merchant account so you can charge the card right?
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.
Given the scenario you described initially, I'm just wondering how many of them have credit cards in good standing to start with? I guess part of your screening process could, in theory, become having them pay for the background check directly with a credit card. Discriminating based on whether or not someone has a credit card would be legal as they aren't a protected class.
@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.
I was thinking of the same idea awhile back. I've seen several food trucks in my area use the square app and it seems pretty convenient. However, I think that would require you to physically meet with the tenants to swipe the credit card and that might even be a challenge.
If tenants get in the habit of using their credit cards to pay their monthly rent, late fees, and such, it might just be a matter of time before you'll have to evict them since they still owe somebody money and having a credit card on their part won't help them better manage their financials.
Another idea I had was to keep a credit card on file and charge it on their move out for any outstanding balances if the security deposit doesn't cover it.
@ 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?
You're cancelling the lease for them cancelling their credit card but then saying you will charge their credit card for damages... That probably won't work ;)
I would make them separate paragraphs. Somewhere in your lease you discuss the security deposit and what it takes to have it returned in full. In there I would add language that any damages which in total exceed the value of the security deposit held the difference will be charged to the credit card on file.
Obviously there's a hole in that plan if you're kicking them out for not having a credit card on file but it gives you some coverage on any other potential move out (eviction or lease end).
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.
I have to agree with you Brian. I had my property manager do a quick survey of my tenants and the results were fairly disappointing, none of them have a credit card. Actually, my property manager does not even have a credit card. I still think the idea is solid, just not when it comes to execution (ie. when it matters). This may be an option for mid to high class rentals, but they would probably not have the same issues with payment. Thanks for helping me through this guys!
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.
Something to consider is that several states have laws about passing processing fees for credit cards directly to the consumer. You may want to check that out for your locality. The way most businesses get around this is by offering a cash discount. For example, you set your general price high enough to cover processing fees and then offer a discount equal to the processing fees for people who pay cash. It seems crazy since it has the exact same effect, but I've seen places in New York get busted for adding a surcharge rather than crediting a discount.
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.
All of this credit card thing should not be necessary if you are truly, thoroughly screening your tenants AND providing them with a nice, well-maintained home. I too rent in blue-collar areas, and this is just not a problem for me. The other thing I do is use direct-deposit to collect the rent each month. Even the one tenant I have who does not have a checking account is able to use that service with his pre-paid debit card. Side note: I generally will not rent to someone if they don't have a checking account--it's a red flag issue.
Do the easy work up front, and the rest of it is easy too.
@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.
@Chris Martin , First, thank you for the info on the Wal-Mart paying thing--I didn't know about it. It's good to know if ever it's needed.
No, I certainly agree with you that it's impossible to predict future problems with tenants. However, through the screening process you can greatly reduce the chances that you'll end up with a deadbeat tenant.
I can't tell that a tenant won't lose their job, but I can use my judgment to determine the likelihood. For example, previous job stability certainly is an indicator of future job stability. Certainly, I can't tell if a tenant is likely to have health issues--that's just silly. I'm not talking about unexpected problems--crap happens to everyone from time to time. But a tenant's history is a very good tool in determinig what you might expect in the future.
I screen for everything. First, on the application, I request information on all accounts--checking, savings, credit cards, loans, etc. I check that information against the credit check that I run. If there is no checking account, it's usually because they have had money problems.
Not to sound uppity, but it sounds like we're dealing with different 'classes' of tenants. My rentals do not generally attract marginal tenants who live financially on the edge. I have one tenant who is like that, but he's been great all along.
I'm just trying to encourage people to do the work up front so that we don't have to invent all these other systems to coax our tenants into paying the rent that is due. If credit cards are a useful tool for you, that's great. I'm only trying to avoid unnecessary extra hassle.
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.
We are off the topic at hand, which is using credit to pay if the tenant is short on cash.
Nobody said not to screen tenants. It came up a few times in prior posts. But I disagree with Terri's premise that "All of this credit card thing should not be necessary if you are truly, thoroughly screening your tenants." Screening is necessary, but not sufficient. Get a security deposit, carry insurance, ... screen tenant, etc.
Possibly one other collection "remedy" is to require a maximum security deposit. Two months in NC for a year lease. Don't know about Pa. For us, getting large $ up front becomes difficult because it makes us less desirable in our current market.
Although not recently, I've taken CC payment for rent (via PayPal) and believe that the "CC on file" methods would be fine if the tenant didn't dispute the charge. Having the tenant initiate the transaction seems more fail proof. FWIW, resort properties routinely use the "CC on file" method for future charges based on a rental contract.
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.
I wanted to raise this post from the dead to see if anyone has any new information surrounding the legality of this practice?
I found this article a bit useful.http://www.quora.com/Apartment-Rentals/Why-dont-landlords-accept-credit-card-payments-1
They want you to sign up to use it though so I just used one of my alias gmail accounts.
If they are not paying rent on time, in what universe will they have enough credit on their credit card to pay rent? I am very doubtful that you will be able to pull this off one time. I see them applying for a different card, closing this card, but more likely this card will consistently decline for lack of credit.
Better check with the CC company on the chargeback policy, if they have a valid excuse of lease payments not being due, paid twice, fraudulent charge or disputed charges. You could really get in a wringer if you charged the card on the 15th and they filed for bankruptcy on the 14th without your knowledge. Consider too taking someone over their limit from an open authorization for rents that can be paid a few days later. I don't think I'd go there on a revolving or open authorization, take it on a case by case basis.
I can also see claims of your dealings in collection matters talking them into paying 18% interest on a rent payment that could be paid within 30 days in most cases before some eviction might be started.
I didn't study the Dodd Frank areas dealing with CC, but there were changes, I don't know if you can, but it smells like it may be contrary to the current flavor of consumer rights to me.
Now, if payment is late and the tenant offered to put it on a card, that's good to go! :)
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing