Today we can pay for gas with a credit card, receive direct deposit of payroll, and pay tolls with an E-ZPass tag. The increasing ability to use electronic funds transfers (EFTs) for payment is a reflection of the convenience, safety, and efficiency of EFTs over traditional forms of payment, namely cash and checks.
Following the popularity of EFTs in other industries, a growing number of real estate investors are moving towards collecting rent electronically. Although checks are still the most widely used rent collection method, smart real estate investors are realizing checks are not as efficient or reliable as electronic methods. Specifically, EFTs via the US banking system's Automated Clearing House (ACH) payment network are an increasingly popular and well-suited alternative to checks.
Electronic Rent Collection Methods
The three most common types of EFT are wire transfers, credit cards, and ACH payments, each having its own benefits and costs:
Wire Transfers: Wire transfers (wires) are typically used for a one-time transfer of funds and cost around $30 per transfer. They feature same-day clearing, so wires are convenient for moving funds on short notice. However, they are a highly expensive method for collecting rent. Additionally, because of their single-use application, wires are typically sent from financial institutions. To pay rent with a wire, a tenant would have to make a special trip to the bank to initiate the payment every time rent is due.
Credit Cards: Paying rent via credit card is attractive to tenants who may accumulate frequent-flier miles or other rewards through credit card usage. However, the high cost and chargebacks associated with credit cards are deterrents for real estate investors.
With credit cards, a percentage (approximately 2% to 3%) of the transaction amount is charged to the merchant (real estate investor) as a credit card processing fee. For example, a $1,000 rent would generate a $20 to $30 processing fee - a monthly charge that, similar to wires, is financially unacceptable for many investors.
A chargeback is when a credit card company returns money to a customer's credit card account because of an error by the merchant. Tenants can file chargebacks at no fault of the merchant (real estate investor), thus creating the possibility of lost rent and/or lost time spent disputing the chargeback.
ACH Payments: The ACH payment network is a decades-old nationwide batch-oriented EFT system. It is the payment network best known for its use in transmitting payroll for millions of employees through direct deposit. NACHA - The Electronic Payments Association (www.NACHA.org) - oversees the operating rules and business practices for the ACH network
ACH payments enable EFTs without the high cost or possibility of reclaimed rent. Rather than charge a percentage of each transaction amount, ACH payments are a flat fee. There is also a delay in crediting (typically 3 banking days) while tenant funds are verified to be "good" (i.e. the tenant bank account was not closed and there were sufficient funds). The credit to the property's bank account reflects cleared funds.
The Benefits of ACH Payments vs. Checks
ACH payments for rent collection offer significant benefits over checks in the areas of cost, convenience, safety, and operational efficiency. ACH payments are:
Less Expensive: ACH payments eliminate much of the paperwork and human interaction associated with checks. Paper, postage, and trips to the bank for deposits are eliminated, and fewer errors occur because of the reduction in human handling of the check-clearing process.
More Convenient: Tenants value a payment option that is reliable, accurate, timely, and confidential. With ACH payments, tenants no longer need to remember to pay, write checks, deliver checks, and/or pay for postage. Some ACH rent collection services, such as ClearNow (www.ClearNow.com), are free of charge to tenants.
Safer: Checks can often get lost in the mail and/or placed in unauthorized hands leaving little protection for tenants. With ACH payments, tenants have peace of mind with Federal Regulation E, the Electronic Funds Transfer Act of 1978, which protects consumers using ACH payments. For example, changes to the amount that will be debited from a consumer's bank account must be communicated and made at least 10 days prior to the debit.
More Efficient: A check in hand is not synonymous with cleared funds in the bank. Checks take time to cash: time for delivery, endorsement, presentation to the bank, and additional stopping points in the check-clearing process. And, while "bounced" checks are an unwelcome surprise long after checks are deposited, investors will know if a tenant has insufficient funds within three days of debiting by an ACH payment.
Getting Started with ACH Payments
Processing ACH transactions can be administratively challenging. To get started, a real estate investor needs to partner with a bank that can originate ACH transactions or a third-party ACH processor so instructions can be sent to the ACH payment network. Once a partner is found, the investor needs to establish an ACH account. Next, the investor must purchase or lease software to create files that can be read by the ACH payment network. This self-directed learning process is quite costly in terms of purchased/leased tools and time. In addition to populating and transmitting files to the ACH payment network, the investor needs to learn how to retrieve "return" files from the network that reflect failed attempts at debiting or crediting a bank account. Finally, the investor needs to comply with NACHA's rules and Federal Regulation E when handling ACH transactions.
Fortunately, there are now inexpensive online rent payment services such as ClearNow (www.ClearNow.com) that eliminate the administrative complexity of ACH transactions. The main task of the real estate investor is simply to enroll tenants in the service. Typically, tenants complete an authorization form and submit it with a voided check. Thereafter, rent payments occur automatically leaving the real estate investor with a safe, efficient, and reliable electronic rent collection method.
Article Provided By ClearNow, Inc.
ClearNow, Inc. is a pioneer in easy-to-administer Web-based ACH solutions for landlords and property managers. For more information, contact ClearNow, Inc. at 866-882-5327 or visit www.ClearNow.com.
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