Using PayPal “Friends and Family” for rent payments is an option some landlords choose. Many landlords and tenants use the “Friends and Family” option on PayPal because it’s simple and free. All the tenant does is enter your email address or mobile phone number. Then, the rent payment appears instantly in your PayPal personal account.
But is using PayPal to collect rent the best way to run a rental business? Even if you only manage one or two rental properties, would using PayPal “Friends and Family” to receive rent could get you into trouble? Are there better alternatives to mobile payment apps for rent payments?
This article answers the question: “Should my tenants pay rent through Friends and Family?”
What is PayPal “Friends and Family”?
PayPal Friends & Family (PPFF) is a popular peer-to-peer payment system, allowing users to send and receive money between family members and friends. The payment service is designed to be used primarily for personal payments. When the “Friends and Family” payment option is chosen, the transaction is free.
How to Send Money to Family and Friends on PayPal
It is straightforward to send money for free via PayPal. First, log into your PayPal account, choose “Send & Request,” and enter the recipient’s email or phone number. After that, you will see a question: “What type of payment is this?” You then choose “Friends and Family.”
Using PayPal “Friends and Family” for Rent Payments
You can send a rent payment using PayPal “Friend and Family” the same way as sending money to a friend. All you need to do is enter the landlord’s email or phone number. However, if you are a landlord, it’s vital to know that receiving rent payment as a “Friend and Family” breaches the terms and conditions.
On the face of it, it seems OK to use PayPal to receive rent money through the “Friends and Family” service. However, on the payment app, you will see that PPFF payments are for “personal payments between you and the people you know.” And, you probably know your tenants relatively well. In fact, the tenant could also be a friend or family member.
Confusion also arises that under the “Goods and Services” payment option, it says that this is for “buying something.” Some websites even go as far as saying that “rent is neither an item nor a service.”
But when looking closely at the terms and conditions of a personal PayPal account, it becomes evident that you can’t use PP “Friends and Family” for rent payments.
Related reading: Alternatives to PayPal for rent collection.
PayPal “Friends and Family” Option — Not Suitable for Landlords
There are several reasons not to ask a tenant to use the PayPal “Friends and Family” option for rent payments. First, while it seems enticing to accept credit cards, debit cards, or instant transfers for free, you risk getting your account frozen. Second, a PayPal personal account is only for non-business transactions.
Here are some of the T&Cs on the PayPal website showing that the PayPal “Friends and Family” option is not for rent collection.
For example, “business PayPal accounts are for people and organizations that primarily use PayPal to sell goods or services.” On the other hand, the personal account is only for non-commercial transactions between family and friends.
What about using a business PayPal account to collect rent payments? There are several reasons why landlords should avoid PayPal for rent collection. First, the T&Cs for PayPal business accounts state that real estate—this includes a residential rental property—transactions are not eligible for PayPal’s Purchase Protection program.
If you breach PayPal’s terms, they could suspend your account, and you could end up losing your money.
Related reading: Easy ways to collect tenant rent online.
PayPal is Not a Specialty Rent Collection Application
While using PayPal for rent payments seems like an ideal digital payment option to collect rental payments, there are compelling reasons to look for alternatives. The main reason is that PayPal is not designed with landlords and tenants in mind.
Here are reasons to avoid PayPal if you want to run a successful rental business.
PayPal doesn’t block partial payments
Choose an alternative to PayPal so you can block partial payments. A digital wallet like PayPal doesn’t allow landlords to block partial rent payments. This issue can cause severe problems if you are trying to evict someone. If the tenant sends part of the rental payment, the eviction process is halted. Remember that PayPal is for person-to-person payments, and you can’t cancel a transaction.
How to Block Someone on PayPal
In some cases, it is possible to block someone on PayPal. To prevent a PayPal transaction, go to your preferences page. Then choose “Block Payments.” Then you can make changes on the “Payment receiving preferences” page. However, this function only allows you to block accidental payments, eChecks, or payments in a foreign currency. It doesn’t stop additional payments for part of the rent.
PayPal “Friends and Family” and “Goods and Services” Fees
Unlike dedicated rent collection apps, PayPal charges fees for debit card payments and business transactions. Even with the “Friends and Family” option, you must pay a 2.9% transaction fee if the sender uses a debit card.
Additionally, when accepting using PayPal for rent payments under the “Goods and Services” option, landlords must pay a 2.9% fee.
Typically, it takes 1-3 business days to transfer cash from PayPal to your bank account. But suppose you need an instant transfer of funds or a cash-out deposit. In that case, you must pay extra PayPal fees to make an instant transfer.
PayPal Lacks Purchase Protection for Landlords
Using PayPal to accept rental payments can put your cash flow at risk. Under PayPal’s TOS, payments for real estate transactions—including rent payments—don’t have any seller’s protection. So what does this mean for you as a landlord?
Suppose a tenant accidentally sends money to the wrong person. In that case, it’s up to the buyer (tenant) to retrieve the funds from the recipient. However, PayPal won’t help the tenant get the money back. This could result in late rent or a missed rent payment.
Another way that PayPal puts a landlord’s business at risk is because they generally side with the tenant in a dispute. Remember, there is no purchase protection for landlords. Here is what happened in a landlord-tenant dispute.
A tenant disputed the rent payment on PayPal after they ended a tenancy. As a result, the funds in the landlord’s PayPal account were frozen. After a lengthy dispute involving lawyers and PayPal, PayPal ruled in favor of the landlord. However, the former tenant opened a chargeback dispute. The result? PayPal then ruled in favor of the tenant, and the landlord lost the rent money.
PayPal Reports Rent Payments to IRS on “Friends and Family”
Some landlords use PayPal “Friends and Family” for rent payments to avoid declaring rental income to the IRS.
However, anyone receiving money on PayPal—in personal or business accounts—automatically receives the 1099-K Form. The reporting requirement to the IRS is that aggregate payments over $600 made through third-party payment services are subject to IRS scrutiny. So, whether you use the “Friends and Family” option or a business account, you must declare your taxable income on the 1099-K tax form.
Why RentDrop is an Alternative to PayPal “Friends and Family” for Rent Payments
The reason some landlords choose PayPal “Friends & Family” is to receive rent for free. However, there are many pitfalls when using a peer-to-peer digital payment app for rent collection. One of the best alternatives to PayPal is RentDrop.
RentDrop is a dedicated service to facilitate rent payments for free. RentDrop lets tenants pay rent by bank transfer or debit card for free. Also, landlords have don’t pay any fees to receive rent payments by debit card, credit card, or direct deposit. However, there is more to RentDrop than just free rent collection.
Reasons to choose RentDrop over PayPal
RentDrop blocks partial payments. RentDrop puts landlords, not tenants, in control of rent payments. This means you can block additional payments during an eviction process. You can specify that only rent payments made in full are accepted.
RentDrop sets up automatic payments. Do you want to minimize the risk of late rent payments? If so, get tenants to set up recurring payments on RentDrop. This way, you receive rent payments regularly and avoid the tenant forgetting. You can also send rent reminders.
RentDrop has several payment methods. With RentDrop, you can say goodbye to old-fashioned paper checks and accept a secure digital online payment method. In addition, tenants can pay by their preferred method.
RentDrop has multiple rent collection options. Using RentDrop as a mobile payment app gives tenants flexibility. For example, roommates can easily split rent. Or tenants have the opportunity to allow parents to pay part or all the rent. Additionally, you can advertise maintenance work for tenants if they want to reduce a one-time rent payment.
Many other features of RentDrop can help streamline your rental business. So why not try RentDrop today by signing up to use the app. It is free to use forever for landlords and tenants.
You Can Collect Rent Through PayPal — But Should You?
Using PayPal “Friends and Family” for rent payments is an option that some landlords use. However, PayPal is best used for sending money to friends or buying items on the internet. If you want to run a successful rental business—even only if you have one or two rental properties—it’s best to look for an alternative.