Does Accepting Prepaid Rent Make Sense?
More and more tenants are requesting to pay their rents all at once, for many reasons. Whether they just sold their house, or they want to offer a lump sum due to a poor credit rating, the occasional tenant may want to put a large quantity of cash in your hand. While that sounds like a dream come true, it is important to evaluate why the tenant is requesting this, and if this makes sense for you.
Here are key issues to think about when deciding whether accepting rental prepayments makes sense for you.
Why are they paying their rent in a large amount?
The natural first question to ask is why are requesting to prepay several months’ rent at once. There are many reasons one might want to pay in a large sum. A tenant who has just sold a come into an inheritance or other sizable payment may want to pay for several months up front. Prepaying may provide an advantage for a tenant who has less-than-stellar credit, but who has funds readily available. Consider whether there are other costs that will be paid monthly, such as utilities, and whether the tenant has shown they will be able to pay these. Assess your comfort level with this unconventional arrangement after hearing why the tenant is requesting prepayment.
Are they asking for a discount?
Prepayment is often used as an incentive to get a discount. Think about whether it is worth having many months’ worth of rent in order to give a discount of five to 10 percent. Is it worth it to you, or do you really need so much of the rent to be paid at once?
Will this negatively affect your taxes?
Most people report income based on when it is received, and expenses when they are spent. This may lead to a large chunk of your income coming in during one year, while your business expenses may occur in another. Assess whether you would like these two accounting categories to be in sync.
Will the tenant be able to pay if you would like to renew the lease?
As a landlord you hope to never go through an eviction, and to limit how often you must turn your property over to a new tenant. If the tenant is making a lump sum payment from one-time income, such as an inheritance or the sale of valuable property, you should consider whether this tenant would be able to sustain payments after renewal time. While it is nice to ensure that rent will be paid, remember that there are costs every time your rental is turned over, whether it is from an eviction or simply a non-renewal of lease.
What happens if they break the lease?
Unfortunately tenants break leases. It happens more frequently than one would like to admit. This raises the question of what happens if the tenant leaves early. While some states allow you to require entire lease fulfillment, others do not. Other states have very specific rules on broken leases. Think about including an early lease termination clause in your lease to spell out how you would handle this situation, especially with regard to the prepayment arrangement.
Do your local laws support accepting large prepayments?
Finally, check into your local laws to find out the legal implications if you accept this much rent up front. For example, is it allowed in your municipality? Does this payment impact eviction scenarios?
Like most issues in real estate, there is not a one-size-fits-all solution. It comes down to what works best for you personally as well as for your business. Some landlords may like having all of the rent paid up front, guaranteeing that this income is collected. In a hot market, it may not make sense to lock into a limited paycheck. Consider how much administrative time you spend on rent collection and receipting. Perhaps you have personal expenses that require you to have cash in hand, making it worth any discount that you may give the tenant. The key is to think about what fits best for you and your business.