Matching Rent Payment Timing to Tenant Income Timing: Good Idea or Bad Idea?
In my first decade of landlording, I required all tenants to pay rent on the 1st of the month. It was easy for me as a landlord to manage cash flow and track who paid on time. It made sense to me as it does to many landlords.
Four years ago, I started using an “ACH” rent collection service for my most reliable tenants to have the rent payment automatically and passively withdrawn from their accounts and automatically and passively deposited in my entity’s account. For these tenants and for my entity, there were no reminders, no envelopes, no checks, no excuses, no lateness and no active effort in rent collection. This is as close as it gets to passive income (see article “How Passive Is Passive Income?”).
But I was still having to manage rent collection with the less reliable tenants, all of whom were required to pay monthly by check by the 1st of the month. As a chemist, I am an experimentalist and I decided to do the following experiment.
Two years after starting using ACH for rent collection, I started offering tenants who were willing to use the ACH service for rent payment, the choice of timing their rent payment to match the timing of their income payment. There are three options:
Monthly: Automatic withdrawal of rent from tenant bank account on the 1st workday of the month
Semi-Monthly: Automatic withdrawal of rent from tenant bank account “semi-monthly” on the 3rd and 17th of the month
Bi-Weekly: Automatic withdrawal of rent from tenant bank account “bi-weekly” every other Tuesday
It has been working out extremely well which is much better than when all rents were due on the 1st. In this article, I would like to explain the rationale, pros and cons for flexible timing using automatic payment of rent through the ACH service to match the timing of the tenant’s income pay periods.
Let’s illustrate with examples.
Semi-Monthly: I have a tenant who pays rent "semi-monthly" on the 3rd and 17th of the month through automatic withdrawal/automatic deposit through my service provider (contact me by E-mail for the name of the service provider). The primary earner is a police officer who gets paid on the 1st and 15th of each month and his salary is as regular as it gets which means that my payment is as reliable as it gets. The payment is scheduled such that if there is a holiday or weekend, the withdrawal is delayed by a day or two such that there is time for the salary check of the tenant to clear before the withdrawal. My police officer tenant gets paid twice each month reliably, so I get paid twice each month reliably!
Bi-Weekly: I have tenants who pay rent every other Tuesday since they get paid every other Friday. The time interval between Friday and Tuesday is to assure that the income payment clears before withdrawal. These payments are called "bi-weekly." One such tenant has been with me for more than 11 years and when paying by check on the 1st of the month, was late 3-4 times per year. Now she pays 26 payments per year by ACH and has not missed a single payment since she started about 2 years ago! This tenant is a perfect example of someone who had trouble forcing 26 bi-weekly income payments that could be on any date of a given month to fit into a schedule of 12 monthly payments on the 1st of each month. Once her payment schedule matched her income schedule, reliability of rent payments went from barely marginal to perfect and everyone’s money management lives got easier!
Are the staggered payments a hassle for me? This obviously sounds like a major hassle to manage cash inflow using three different payment schedules of 12 times per year, 24 times per year and, worst of all, 26 times per year!
The answer became obvious when I asked myself:
"WHO IS BETTER AT MANAGING MONEY, ME OR MY TENANTS?"
Once I framed the question in that manner, it became obvious to me that I (or my property manager) can manage cash inflow better than my tenants can manage cash outflow.
If my tenants are paid bi-weekly (26 times per year) or semi-monthly (24 times per year) AND they are not homeowners, their budgeting skills in real life are less likely to be reliable than mine, a business owner. I have been using Quickbooks to manage cash flow for multiple businesses for almost two decades.
Since I moved tenants to rent payment schedules that match their salary payment schedules AND use automatic withdrawal, delinquencies have dropped to nearly zero! That's my big benefit.
Yes, I had to get used to a new cash flow management, but this nearly eliminated rent collection management! That benefit of reliable on-time payment for me outweighs the adjustment I had to make in my cash flow management.
In fact, I previously already had a much bigger hassle in cash flow management by having to pay property taxes quarterly (a very big deal in New Jersey) that I prefer not to escrow, quarterly sewer/water bills for the county and certain townships as well as a semi-annual sewer bill in one township. So, most of us landlords are already used to handling the non-perfect match of cash inflow timing with cash outflow timing.
Most of us already know that solving the cash flow timing "problem" is easy by maintaining a cushion (min/max like in inventory control). This minor hassle of maintaining a cushion for me is a lot better than forcing my TENANTS to maintain a cushion for the purpose of making it easier for me.
I would much rather get paid PASSIVELY AND RELIABLY than get paid less reliably and have to manage the collection process. For me, a key component of the tradeoff is the passivity of automatic withdrawal/deposit since that eliminates the activity of "rent collection."
I still have one tenant who pays by check (monthly). She has been paying reliably since 2010 but now I'm spoiled with everyone else paying automatically and I dislike the fact that someone must be available near the 1st of the month, just to physically pick up and deposit one check from the PO box.
Please note that the automatic withdrawal/deposit fees are paid by the tenants (except in one case from when I first started this a few years ago) and they gladly pay it since: (1) it increases their credit scores with Experian due to reporting by the ACH service provider and (2) yup, it makes it much easier to manage cash flow from the tenants' standpoint. A disadvantage of using this service is cost (passed on to the tenants except for my first tenant who started using it 4 years ago).
Note that I am a part-time investor who always has 10 or less high cash flow rentals at any given moment since my goals for cash-on-time return are as important as cash-on-cash return. In addition, I don’t have low end rentals (relative to my market). All my tenants are employed and their household incomes range from about $50,000 per year to about $130,000 per year. Therefore, what works for me might not work for you if you have an empire of tenants and/or have tenants with lower income levels.
In summary, my philosophy is that I like getting paid reliably and predictably on a somewhat irregular schedule that meets the needs of the people paying my LLC (or self-directed 401k) more than getting paid slightly less predictably on a schedule that meets my entity’s convenience. That's because I'm better at managing cash flow than tenants who statistically are more predisposed to not managing money very well. When you enjoy positive cash flow...don't worry, you'll figure out how to manage it and what to do with it!
Postscript: If you would like the name of my ACH service provider (for automatic withdrawal/automatic deposit), please contact me by E-mail.
Biography: Marc Halpern is a successful part-time investor who has achieved financial freedom in terms of passive income and net worth mostly through rentals and flips using “regular” money and self-directed 401k funds.
E-mail Marc Halpern directly if you want to improve your profits through coaching by a local expert in South Jersey/Philadelphia with track record.