How to get tenants to pay 12 months upfront!

Question

Thomas S. · Answer

Cool idea (not) but likely illegal since the money up front is not yours to spend.

Rent payment in advance remains the property of the tenant and must be held in trust to be drawn on each month as rent comes due. In the event the lease is terminated early a portion of that money is to be refunded to the tenant.

What you are doing is a major business mistake and the reason why landlords never accept advance rent payments from tenants.

Account Closed · Answer

@Michael Wagner Thanks for your question and it is a good one.

1. I always make sure I have a large sinking fund for my entire portfolio.

2. I also keep up with regular maintenance for all properties and have excellent management in place that don't delay with anything that needs to be taken care of.

3. I buy right and do enough research and due diligence on properties before making an offer - Strictly B class for me.

4. I have enough other rentals in place to continue to cash-flow if anything does go wrong.

Michael Wagner · Answer

Very cool idea and congrats on executing.  My only concern is that you say your are spending all that money to buy another house.....what happens when you need to do repairs on your first house but you've spend the whole years worth of income on the  next house?  Do you escrow to prepare for the unforeseen? Or do you have an emergency source of funds?

Account Closed · Answer

Thomas S. If they demand repayment (though it's never happened ), then I have reserve funds. And if they all got up and left on the same day at the very beginning of the contract, then I'd be the unluckiest landlord alive, but there is also a lease in place that they have to provide ample time for breaking it. To your point about plenty of money. Reserve funds are reserve funds and not for spending on properties.

Brad Russo · Answer

Pretty good recommendation are given here.

If you decide to get 12 months upfront rent, you need to be sure that your tenants won’t want you to stay away from the property. So, make sure that agree on regular inspection of property.

Kim Meredith Hampton · Answer

Account Closed this is illegal to take the renters money and use for other things. The rent is not yours until earned. Meaning the "advanced rent" needs to go into an escrow account and taking out monthly when earned.

What if the tenant died, moved out etc.... and now you have spent all of their money. You should be really careful and check your landlord tenant laws where your property is located. This is not your personal piggy bank

Thomas S. · Answer

Your management company will not be held responsible, you will. Legally you have stolen their money.

Everything will be fine until it isn't and if that happens you will have serious regrets.

Alexander Felice · Answer

Sounds good, but I wouldn't let me tenants pay me a full year up front even if they paid over my asking rent.

As @Michael Wagner said you just spent your maintenance and capex budget.

What if they move out early and demand repayment?

What if you want to evict them, now it's much more difficult and still requires repayment.

Now, if you had plenty of reserves to cover these risks, I would say it doesn't matter. HOWEVER if you had plenty of money to cover these risks then you likely wouldn't be needed to borrow forward so much of their capital to buy the next unit. If it works for you, great, but for me it's quite risky

How to get tenants to pay 12 months upfront!

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