Upfront Rent Payment
Investor · Charlotte, NC · Member since 2016 · 3 posts · 1 vote
Upfront Rent Payment
Most Popular Reply
Never take payment in advance. If you do it is still the tenants money until applied to each monthly rent. If you do anything other than deposit in a designated account it is stealing regardless of the agreement. When a tenant changes their mind you get screwed. As the landlord you have no right to touch that money except to withdraw the rental amount owed at the beginning of each month. Never give a discount as if they leave they will be entitled to any unused portion back.
Legally you will also owe them interest on the money.
23 Replies
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes10y
No discount. If they break the lease early, and you find another tenant, you would be obligated to return whatever wasn't used. I have accepted rent early - say from college students whose parents live out of town - but no discount. The rent price is what the rent price is; there's no real advantage to you to have it all at once, since you're not entitled to it until they use the service.
Think of it this way: if the fair market rent is $1000, you're renting it to them for $950. That's 600 dollars you are leaving behind for the year.
Skyline Properties - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes10y
If you have a lease with them and you have their full payment for the 12 month term, they are going to have real trouble breaking the lease. If they moved out and then went to court asking for their money back, you would have a lease showing the money is rightfully yours.
Something to consider may be offering a smaller discount such as 2% cash up front. I think a 5% discount is pretty heavy considering what bank deposits are getting. Sure you could invest with more risk and get better than 5%, but I am thinking they would be willing to take less.
One final thing to consider is the tax burden of claiming this expense for 2016. You will have an extra 6 months worth of income on your taxes, so expect to show a higher than normal profit on the property. Then next year, you will have the benefit of lower income on the property. This is just something to consider.
- Charlotte, NC · Member since 2015 · 20 posts · 7 votes10y
This is and interesting question with pros and cons on both sides. On the one hand your already giving yourself a 5% vacancy on the year, so you can compare this to what you have budgeted for that property. On the other you won't have to worry about going after them for rent every month. The question is, how much is your time and piece of mind worth? Can you take the 5% loss and put the time and energy you would have spent going after rent and turn that into another deal?
Never take payment in advance. If you do it is still the tenants money until applied to each monthly rent. If you do anything other than deposit in a designated account it is stealing regardless of the agreement. When a tenant changes their mind you get screwed. As the landlord you have no right to touch that money except to withdraw the rental amount owed at the beginning of each month. Never give a discount as if they leave they will be entitled to any unused portion back.
Legally you will also owe them interest on the money.
- 10yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
No benefit to taking money in advance, but it does make for much more liability.
as @Thomas S. said, never take full year payments in advance.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes10y
Originally posted by @Thomas S.:
Never take payment in advance. If you do it is still the tenants money until applied to each monthly rent. If you do anything other than deposit in a designated account it is stealing regardless of the agreement. When a tenant changes their mind you get screwed. As the landlord you have no right to touch that money except to withdraw the rental amount owed at the beginning of each month. Never give a discount as if they leave they will be entitled to any unused portion back.
Legally you will also owe them interest on the money.
What country or states are you giving legal advice for? In my state when I collect advance rent, I deposit it and I pay taxes on it in the year received. It is not kept in a separate account and I do not have to pay interest. It is no different than someone sending July rent to me on June 10th. I don't hold the payment until July 1st in a separate account. I am not familiar with Canadian laws, so maybe it is local requirement for you?
According to this website there is no statute for prepaid rent in North Carolina:
https://www.landlordology.com/north-carolina-landlord-tenant-laws/
- Investor · San Jose, CA · Member since 2011 · 355 posts · 90 votes10y
@Thomas S., I get where you're coming from but I think you may be overstating it. Clearly we all know/agree that the money isn't really yours until used by the tenant for that month's rent. If they leave early, you'd have to refund an unused portion - but there are some clear advantages:
- There's no holdover/collections risk
- They're still obligated to the entire term of the lease, which means that if they want to leave early their clock doesn't stop until the new tenant moves in (or the 12 months is up). This protects you from turnover loss.
I'm not saying it's always good, I'm just saying it's not always bad, and I can imagine myself accepting a small (5%, say) discount for an up-front payment.
- Rental Property Investor · New York, NY · Member since 2011 · 956 posts · 510 votes10y
if you take rent in advance and there's a problem, (ex:loud partying), you cannot evict as they would have already paid . Not a good idea.
- Charlotte, NC · Member since 2014 · 101 posts · 40 votes10y
Originally posted by @Thomas S.:
Never take payment in advance. If you do it is still the tenants money until applied to each monthly rent. If you do anything other than deposit in a designated account it is stealing regardless of the agreement. When a tenant changes their mind you get screwed. As the landlord you have no right to touch that money except to withdraw the rental amount owed at the beginning of each month. Never give a discount as if they leave they will be entitled to any unused portion back.
Legally you will also owe them interest on the money.
You may be right about the first part under some interpretations of the North Carolina Tenant Security Deposit Act and based on how the lease is written, however in North Carolina the landlord does not have to remit the interest on trust account to the tenant, so they wouldn't necessarily owe the tenants money - it would depend on the lease.
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes10y
Originally posted by @Matthew Russell:
Hi All!
I own a SFH rental in the Charlotte, NC area and I am currently working with an applicant interested in my rental. For some background I have already received a rental application and performed my due diligence and the applicants check all the boxes (income, credit, rental history, etc) and then some!
As we were working out the details of the lease, he asked me the following question: "Could they pay the 12 month lease upfront with cashier's check for a 5% total discount?"
I am considering this since it would give me security over the term of the lease and I could use this funds to invest elsewhere.
My main question to the BiggerPockets community is: What happens if they voluntarily break the lease after 6 months, then it take me 2 months to rerent (so previous tenants are on the hook for 8 months). Am I obligated to pay the additional 4 months of prepaid rent back to that tenant?
Thanks!!
If you get in in writing add in contract that this is non refundable should they break the lease. Better to be safe and always get everything in writing down to the littlest detail.
Alex
- Investor · Edwardsville, IL · Member since 2015 · 432 posts · 481 votes10yI would caution you on taking money upfront for several reasons: 1. We are talking renters and most do not have money or they would buy their own house. Did the money come from drug money? Are they going to setup a meth lab in your rental? 2. Check your state laws on deposits. You may be limited to 2 or 3 months. 3. A 5% discount seems steep to me. What do you pay your banker for a loan?
You can do what ever you choose and based on past practices, lease language etc, feel quite confident right up till they take you to court. They can also claim after they moved in that they were coerced into paying in advance and coerced into signing your agreement. Professional tenants have done this very thing and in court have/will/may win. Once they get all their money back they stop paying rent and live for free until you evict.
Our business is designed to collect money on the first of every month and usually when landlords get greedy at the sight of a wad of cash their brains and common scenes go out the window.
At the end of the year I make my full income without ever having to reduce my rent.
Greedy people get what they deserve and deserve what they get.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes10y
@Thomas S. what is the source of your statement when you say in North Carolina that advance rent would need to be kept in a separate account, that you cannot touch it and you must collect interest for the tenant? I searched and found no such legal requirement in North Carolina. I believe when collecting advance rent you would actually be required to claim it as income and pay taxes on it in the year received (US government will require this). Advance rent is completely different than a security deposit unless. If I am wrong about this, can you site a source?
Your follow-on comment about professional tenants makes no sense. Why would they pay up a year in advance, then sue you to get it all back, then live there rent free? That is strange scam. Have you actually experienced that happening or are you just making stuff up?
There is nothing greedy about securing rent up front and if it is negotiated with a discount for the tenant, it is actually a mutually beneficial agreement.
I have received a year of rent up front and had a great experience with it.
- 10yAdam SchneiderPro MemberLender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
@Matthew Russell You asked a great question and stimulated great debate. The first thing to do is research the NC General Statutes to see if there are restrictions. Here's a great summary regarding land lording in NC--
https://www.landlordology.com/north-carolina-landl...
It doesn't appear that there's a legal restriction to accepting prepaid rent, although I didn't do a deep nose dive.
You might want to consider writing it as a lease for one year and not breaking it down into months. So, if you would have done say $1000/month, you write it as a one year lease at the rate of $11,400 per year (that's 95% of the $1000 times 12). Keep in mind that the eviction time frames and risks change. The good news is you won't have to worry about rent payments.
The numbers part of the analysis seems like a no-brainer. Having 95% of what you collected but having it up front to use as you want and to not hassle with the 12 rent collection transactions is enviable. You can pay down any debt you have that's above the 5% and be a winner there, or use it as operating capital, etc....
One of the respondents said not to take payment in advance...if you word the lease as a one year lease, you avoid the issues of it being considered advance payment.
Good luck.
- Investor · Cathedral City, CA · Member since 2014 · 481 posts · 170 votes10y
All lease(s) should have a "Break the lease" clause. There should be rules and they should apply to a tenant as well as a landlord to remain legal. For a tenant to break a lease is unavoidable 100% of the time. You need a agreement how both of you deal with this. There should be a one time charge of 1.5 months rent to 2 months rent in your lease.
- Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes10y
As a long time experienced landlord who knows other long time experienced landlords the best advice I can give you is; don't do it!
Large chunks of up front rent are a huge red flag that you are going to have trouble with that tenant down the road. Don't ask me why this is because I don't really know. It just is.
- Rental Property Investor · Huntington, WV · Member since 2014 · 7 posts · 1 vote10y
I've done this many times, and I usually offer discount for lump sum. I probably wouldn't for students as much though. I'm actually going through a problem of a tenant who wants to leave, and I want her to leave as well (she put a satellite dish on the roof!!). She is paid up through Aug 2016. I struck a deal with her that she would leave by July 31 and forfeit the extra month and DD in return for being allowed to leave early (lease ends in Dec). I also added a clause in the release form that she will receive prorated amount back if she leaves early, ie, July 15 would get her half of one month refund. Hope it works out, we'll see. She is a strange one.
But normally, you would owe her a difference. Interest would depend on the state I believe. Good luck.
- Rental Property Investor · Huntington, WV · Member since 2014 · 7 posts · 1 vote10y
Also, Robert Steele seems to be correct in general. I don't know why, but unless it's a student, it usually ends up being a bad situation. They tend to be unusually demanding, and just like the example of basement apartments attracting a strange type, this type of payment seems to indicate the same thing. Usually, they can't manage money, don't take care of the place as well. But, it's tempting to secure that rent!
We do have documented cases of professional tenants paying in advance then demanding it back in Ontario. Depending on where you operate there may be regulations that appear to not make a landlord responsible but you do not want to be the landlord that becomes the landmark legal case to change those rules.
More importantly there may be other reasons for a tenant to bribe a landlord with advance payments. First they hope to never see the landlord once they move in. Possibly so they can set up a grow op or they may have some other mark on their past that they do not want their landlord to dig too deeply into.
My opinion is landlords that operate business this way, as opposed to the standard, are simply lazy landlords believing life will be better for some reason. To me all it amounts to is lost income. I would never trust a tenant foolish enough to throw cash around in that manner. Something stinks.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes10y
Two words: "Pacific Heights". The nightmare tenant in that movie pre-paid rent.
I prefer to identify tenants who are going to be long term. Most of the long term tenants don't have a full year's rent sitting in the bank. If they can accrue that much into a bank account, they will be able to have purchase money deposit in a short time as well. And if that money was a windfall it's just a one time thing - maybe they would blow through it so possibly not good with a budget, and next year you might be chasing after rent.
- Member since 2021 · 1 post · 0 votes5y
Some of the dumbest responses I've literally ever seen in regard to this topic can be found right on this thread. First of all, I never have had a problem accepting rent in advance. The idea is to obey laws, protect the asset or property first, then make money if you're renting it out. You can accomplish all 3 and not have a single problem. I have done it plenty of times to all walks and races alike. To me, only people who struggle to get individuals to "check all boxes" and end up having empty units for sustained periods would say the stuff they are alluding to here. Yeah, that's the ultra conservative approach and one is entitled to their own opinion, and how they manage their assets, but all I know is, rent upfront is not a red flag in every case nor does it mean the renter will break lease. Gotta be able to use a bit more discernment than that if we want the truth on pros and cons with that scenario in real estate.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.