How (and Why!) You Should Calculate Prorated Rent For Your New Tenants

One common issue that landlords have to deal with is prorated rent, which is rent that is calculated based on the number of days that the tenant will be occupying the property. In fact, most landlords have had to prorate the rent at least once or twice for a tenant, and there can be numerous reasons for doing so.

For example, tenants will typically only want to pay rent for the exact number of days they live in the apartment—especially if they’re moving in or out of the unit mid-month. So, if their move-in or move-out date starts after the first of the month, the tenant will typically expect to pay less money for rent during that time, as they are not occupying the property for the full duration of the month. In that case, it makes sense to calculate a proportion of the monthly rental rate based on the number of days the tenant occupies the property.

But while prorating the rent can be extremely helpful for your tenant, it’s not always ideal for the landlord because rent proration requires more work. And, if you manage multiple rental properties, it can become difficult to keep track of each tenant’s unique payment schedule. That said, there are numerous advantages to prorating rent for you and your tenant. These benefits are outlined below—along with tips to make rent proration more manageable for you. Here’s what you should know.

What is prorated rent?

Prorating the rent means you’re allowing a tenant to make a partial rent for the month. Rather than paying for a full month, you’re allowing the tenant to pay their rent based on the number of days they’ll be occupying your unit. And, in many cases, this will need to be done when the lease is signed, as the first and last month’s rent are typically paid at that point.

For example, if a new tenant is moving in on the 10th of the month, you would calculate a daily rental rate by dividing the full amount of rent by the number of days in the month. From there, you would multiply the daily rental rate by the number of occupancy days. In this case, that would be the 10th through the end of the month. Calculating rent proportionately lets you collect all rent money owed.

How to calculate prorated rent

There are several methods that can be used to calculate the prorated rent, and not all of them use the same factors. How you choose to prorate rent for your tenant is just that: a choice.

For example, some landlords or property owners prorate rent using the number of days in the actual month, which would mean that the daily rate would vary from month to month. Others opt to base the rent calculations on the average number of days per month (30.42), using a banker’s month (30 days), or the number of days in a year.

The best way to explain prorated rent is to look at an example. Let’s say you want to calculate the prorated rent based on the number of days in the month, and your tenant’s move-in date is July 18. With 31 days in the month, the tenant will live in the apartment for 14 days in July. Therefore, their prorated calculation for rent would be based on the partial occupancy for that month.

In this case, the monthly rent rate is $1,400 per month. That means the daily rate is $45.16 (1,400 ÷ 31 = 45.16). So, the prorated rent for the partial month would be $632.24 (45.16 x 14 = 632.24).

You may have a similar clause in the rental agreement regarding the last month’s rent. For example, you would need to calculate a prorated rental period if the lease term ends before the last day of the month. Or, you may need to calculate the prorated rent if your tenant has a valid reason to vacate the rental property earlier than what is outlined in the lease term.

To calculate the last month’s rent, you would multiply the daily rent rate by the number of days the tenant will remain in the unit. You would then collect the last month’s rent at the beginning of the last month or week the tenant is in the apartment.

Note, though, that whatever method you choose, it’s vital to have the information on the prorated rent rate and calculation included in the lease agreement. You should also make it clear in the lease as to when the rate will change to the monthly rate.

Four benefits of prorating rent

So why prorate rent if you don’t have to? It may seem easier to simply collect rent for a full month than it is to prorate rent for a tenant. After all, being a landlord is challenging enough without making life more complicated. And, if you’re not getting an entire month of rent, it may feel like you are losing money.

However, there are several valid reasons to offer tenants prorated rent. These include:

1. You can fill vacancies faster.

If you want to quickly fill your vacancies with the right tenant, offering to prorate the rent can be an attractive option for prospective renters. Tenants will appreciate your flexibility—and with the lower rent costs, they may be more willing to move in quickly, even if the lease doesn’t line up with the first of the month.

Think about it. Let’s suppose a tenant has a choice between two similar rental units. One landlord offers prorated rent and the other doesn’t. If all other factors are comparable, the renter is more likely to choose the first unit with prorated rent—as it will cost them less money and may even fit their timeline better.

2. You can improve your cash flow situation

Prorating doesn’t cause you to lose money—it helps maximize your cash flow instead.

For example, let’s say a tenant wants to move in on the 14th of the month but doesn’t want to pay an entire month’s rent for the first month. If you aren’t offering prorated rent, they may choose to wait until the first day of the following month to move in so that they aren’t paying a full month’s rent for half a month. This means that you miss out on money because the unit sits vacant.

On the other hand, if you offer prorated rent to the tenant, you’ll be collecting rent on the days the tenant occupies the unit rather than letting it sit empty for two weeks while earning no rental income.

3. You’ll build a reputation as a trusted landlord.

Prorating rent for your tenants reinforces the idea that you’re not out to nickel and dime from them as their landlord. Rather, you show them from the start of the lease that you are willing to work with them. This usually results in a better landlord-tenant relationship.

That said, you should still follow all of the standard procedures when working on a rental agreement with your tenant—even if you’re prorating the rent for the first month. That means getting a signed lease, collecting the first full month of rent and security deposit, and then handing over the keys.

4. You’ll know how to offer flexible rent payments.

Many landlords find it beneficial to provide tenants with the ability to pay monthly rent on a weekly or bi-weekly basis. Flexible rent payments are ideal for self-employed people or workers in the gig economy because they let these tenants break their rent payments into smaller, more manageable chunks throughout the month.

And, letting tenants pay rent on their schedule can also result in fewer late rent payments and charging late fees—which is ideal for both you and the tenant. If you’re already using a prorated rent calculator to prorate first or last month’s rent, that will make it easier to work out a rent payment schedule based on a weekly or two-weekly rental rate if you need to.

Note, though, that offering flexible rent payments is not the same as working out a payment plan for a tenant with rental debts.

Tools to help calculate prorated rent

The easiest way to calculate prorated rent is to use a trusted property management software or a dedicated rent collection app. Many apps for collecting rent online have a handy function to automatically make prorated rent calculations and charge the appropriate rent to the tenant.

This can be especially useful if you manage multiple rental units. Plus, you may be able to use these apps to set up flexible payment schedules, let tenants pay rent in advance, and split rent among roommates.

Final thoughts on prorated rent

Tenants look for more flexibility from landlords when we’re in uncertain financial climates—like we are right now. By offering to prorate rent, you can show potential tenants you’re not interested in squeezing out every cent from them. Prorating rent is not difficult, and it can help reduce vacancy, improve your cash flow and rental income, and set yourself apart from the competition in a tough rental market.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.