HMO Rent Collection is an crucial part of any HMO business. But what’s the best way to collect rent, how and when should we do it?
Cash, direct debit, standing order or 3rd party collection service (company)? They’re all are viable options. This article will give you better information on which one may suit you best.
Before arranging rent collection
Before signing a tenancy agreement (i.e. before arranging the rent collection details), it’s imperative to ensure that you have:
- A tenancy agreement that lets you clearly define when the rent should be paid, and by which method. Having the details clearly written in a contract can be crucial to settle any potential disputes.
- All of the pre-tenancy documentation for your new tenants is in order, which includes the following:
- A valid EPC
- A valid Gas Safety Certificate
- An up to date copy of the Government issued ‘How to rent’ guide to provide to your new tenant
- A clear understanding of where you want to secure the tenant’s deposit and the prescribed information you need to provide to your tenant
- Checked to determine whether your tenant is legally permitted to rent in this country (England).
- While the above is not an exhaustive list of a landlord’s legal obligations, they are specifically required to be complied with in order to help manage any problems when collecting rent. For example, if you don’t meet the above obligations, you may run into problems repossessing your property in the most efficient way in the event that your tenant stops paying rent. For more details, you may want to jump over to my Landlord Regulation Checklist For New Tenancies blog post.
Essentially, make sure you follow all your landlord legal obligations to put yourself in the best possible position to minimise any rent collection problems that may occur.
When does rent need to be paid?
Most landlords require rent in advance, which means, if rent is paid monthly and is payable on the first day of the month, the tenant pays rent for August’s rent on the 1st August, and not 1st September (end of the month).
However, as highlighted on the Landlord Law Blog: under the general law, if your landlord does not provide a tenancy agreement specifying that rent is due in advance, then rent is payable in arrears.
Various ways I have received & collected rent
Over the years of being a landlord I’ve received rent in various different ways, although none should come across as utterly surprising…
- Standing Order (not Direct Debit)
I’m not entirely sure if there are other ways of receiving rent, but I think I listed the most common methods. Then again, I’m sure there is a network of seedy landlords accepting payment in forms other than money. Maybe when I get a little older, a bit wrinklier, and a lot less attractive, I’ll be jumping on the bandwagon, and accepting in those “other” ways…
I’m sure each landlord has their own personal favourite for different reasons. While I can guess which is the most desired method, I’m sure some landlords have their own unique circumstances which will sway from the obvious choice.
My analysis of each payment method
Cheques are kinda’ irritating and extremely old school, that’s why they’re becoming extinct. But you still get those die hard fans that just won’t let go.
The problem with cheques is that they need to be posted, and then once received, they needs to be deposited it into a bank. Not to mention the 3-5 working day clearance time. The entire process is just long, and that’s why this is my least preferred method.
Needless to say, this method opens up a huge window of opportunities for tenants to lie through their teeth. It’s just inviting them to say, “The cheque must have got lost in the post. I sent it, I swear”
Yeah, right, asshole!
My favourite method because they’re easy to setup and reliable. Also, electric transactions leave behind a foot-print, so it’s incredibly easy to track/prove what has been paid and when.
Standing orders payments in general are typically used to make rent payments. This is when a tenant tells their bank or building society to make regular payments to a particular bank (i.e. the landlords bank). They’re incredibly easy to setup these days- most banks allow you to it online.
Standing Orders are often confused with Direct Debits, but there are distinct differences, but in most cases, tenants should be setting up a Standing Order to pay the landlord. The main difference between the two is that with a direct debit you tell your bank or building society to let an organisation take money from your account, so for example a monthly gas bill (which is likely to change every month, depending on usage). A Standing Order is fixed, you set them up to pay exactly the amount you choose, not the amount you owe to an organisation.
I’ve had one tenant pay directly by cash before. I have no idea why, but I didn’t ask any questions (it’s always best not to).
It’s not the most ideal method, but I didn’t mind too much. The catch here is that I had to collect it every month, but he didn’t live too far, so it was cool.
The bonus with my situation was that it gave me an opportunity to see what condition the property is in. So I was effectively doing a monthly inspection. However, one of the major drawbacks with cash payments is that unlike electric transactions, it doesn’t create a foot-print (maybe that’s what you want though… but that’s your business!), so you should create a receipt, which can be relied upon if there are any disputes.
Be warned though, cash payers are notoriously higher-risk, because there’s usually a reason for why they want to pay cash, and those reasons aren’t always very desirable.
What about Direct Debit?
Many people, landlords and tenants in this case, get Direct Debits confused with Standing Orders.
In 99% of times, when a landlord says they want the rent paid by Direct Debit, they actually mean Standing Order.
In order to setup a Direct Debit, the tenant must sign a mandate to allow the landlord to deduct the rent from the tenant’s account each month. The landlord will then be able to change the amount at their whim. So with Direct Debits, the landlord is taking the money from the tenant’s account.
Standing Orders work the opposite way round, because this is when the tenant sends the money to the landlord (i.e. sets up a fixed amount to transfer to the landlord each month), so no mandate is required, and the landlord has no control over how much is sent.
Conclusion – The Best Method of collecting rent
For me, there’s only one clear winner, to accept rent by Standing Order. It’s easy, reliable and secure!
Landlords, how do you currently collect rent, and which method do you most prefer?
Tenants, how do you pay rent?
Rent Collection Service
If you’re using a letting agent to manage your let, then the odds are they’re collecting the rent on your behalf. That’s all pretty standard.
However, many landlords use services that just handle rent collection – and nothing else. It’s generally cheaper than a fully managed service, which typically includes rent collection, handling of repairs and maintenance, tenant viewings, inspections etc.
So why would a landlord use a pure rent collection service? Because it’s generally a more reliable means of collecting rent, and it means the landlord can avoid getting directly involved with any disputes over rent, should any occur.
Rent collection service is pretty self-explanatory; you pay a third party company to be responsible for collecting the rent from your tenant, and they will then transfer the rent into your account, typically minus their handling fee.
There are various types of rent collection services, which usually vary on how much protection you receive. So if you plan on using one, make sure you’re aware of what you’re actually paying for. For example, many of the basic (and cheaper) rent collection services won’t “guarantee” the rent, so if your tenant doesn’t pay, you won’t necessarily be able to reclaim the losses through the service. However, they will usually attempt to chase your tenant for the arrears, which can still be useful.
The more comprehensive (and expensive) packages may include legal cover, “rent on time” guarantee (so even if the tenant fails to pay rent, you will still get paid regardless).
The important point to remember is that rent collection services are not all the same, so it’s best to look through the various options and choose one that will meet your requirements.
Rent Collection Service Providers
There are many rent collection companies and services to choose from, you only have to Google around to get swamped by the options. To make your search a little easier, I’ve highlighted three pretty cool solutions, all providing very different propositions.
One of the most comprehensive rent solutions I’ve come across is offered by the online letting agent LettingAProperty.com. They’re one of the few that actually “guarantee rent on time”, even if the tenant defaults on rent! Note, this isn’t the same as a RGI (Rent Guaranteed Insurance) policy, where you have to file a claim and then wait for the claim to get approved before receiving a payout. “Rent on time” literally means you will receive rent on the day you’re meant to, always. So if you want rent on-time, not a bad choice at all.
The package also comes with a bunch of other goodies, like a “Rightmove tenant-find advert” and “tenant referencing” More details below.
Of course, I have to give a shout out to OpenRent, the UK’s biggest online letting agent, because they recently launched a handsome rent collection service that cost peanuts, which is part of their “Rent now” package. And no, your eyes aren’t playing tricks on you- it really is £49 (inc VAT) for the year.