Have you ever had a tenant pay a year in rent up front?

Question

My rental has been a hit these past two days with many people wanting to come see it with Feb 1st move in date. I received a call today and lady wants to come see it on Monday and she wants to pay rent for a year up front? I said that would not be an issue as long as it’s a bank wire, certified check or money order, she replied all are fine. She is aware she would be paying 12 months, plus deposit and security.

Is this weird????

It will cash flow anywhere $600-$675 a month. My mortgage broker gave me that estimate after receiving all my documents. He’s working on getting me a mbetter interest rate thus bringing me closer to $675.

Rent is $1275 a month for a 3 bedroom/1.5 single family house, basement, and backyard fully renovated.

Alan Pederson · Answer

I had a few people offer to pay the entire year rent up front. The problem was when I told them I would still be going thru the standard background and eviction check. I never heard from them again. I suspect that they had something that would have disqualified them and they thought by offering cash that I would not do my due diligence. It was tempting though.

Thomas S. · Answer

Considering the fact that the money will remain the property of the tenant until drawn on each month to pay rent it only adds another level of responsibility for the landlord in having to manage the money for the tenant. If the landlord believes they money is theirs when received they are incorrect. The tenant may legally demand the return of any unused portion at any time. It would be illegal for the landlord to use any of the money aside from each monthly rental payment. The money must be placed in a separate bank account.

I would first screen the applicant to insure they are acceptable. Assuming the applicant passes normal screening I would instruct them to set up a separate account of their own, deposit the years rent, and then provide me with 12 post dated checks for rent drawn on their account.

Many offer the money as a bribe due to the fact that they are not qualified applicants. Novice landlords will often fall for this trick. I am a landlord not a banker and have no interest in managing a tenants finances for them. If they are so irresponsible as to need to pay up front I would probably not take the risk of renting to them. Come year 2 you may end up with a eviction on your hands.

In my area professional tenants make the offer and once they move in demand the money back then stop paying rent.

Casity Kao · Answer

@April Molina  @Thomas S. is correct.  It is a farce.  If the tenant becomes a nuisance and you have to evict the tenant for cause it will only become more of an issue and you still have to return unused rent.   In my areas a lot of renters will offer this to get your attention and avoid a background check but they are the worst of the worst and you are just putting off a big problem in my opinion down the road.  I would only accept it under certain circumstances e.g. out of country tenants.  I have had good luck with these tenants because of lack of history.

Ned J. · Answer

Thus would tingle my spidey senses...... why are they trying so hard to make themselves look appealing? What are they hiding?

I'd personally feel uncomfortable with it.....I'm now the bank and just deducting my fee each month.......and at any time they could ask for the unused balance back.

On the face, it sounds appealing to get all that $$ upfront, but its not mine until each month passes......

Jackie Creighton · Answer

I would do some digging and try to find out why she may be so willing to pay all 12 months up front. Tenants that are willing to pay up-front have their advantages and disadvantages. But I would make sure to properly screen the tenant before further entertaining her offer. I've had mix experiences with tenants who are willing to pay more than 4 months rent upfront. Sometimes it is convenient and they are an ideal tenant who doesn't want to worry about budgeting, but I've had another instance where the tenant paid 6 months upfront but wasn't able to keep up with rent after the 6 months were up. All of these issues usually lead back to the screening process.

Tommy F. · Answer

@April Molina Yes, I rented to a tenant for one year advance and I had an existing tenant choose to pay six months advance.  The one year advance was a couple with kids relocating, they wanted to be in the school district, and my house fit their needs.  The husband was not employed at the time, the wife was a nurse, and they had cash to pay the advance.  They offered the advance to make them a more appealing prospect in their eyes.  I was fine with it.  They stayed 2 years, no problems at all, the second year rent was paid on time, rarely heard from them except check in the mail.  The existing tenant who paid 6 months advance did so on a renewal, he had the money, and wanted to get it of his pocket.  Works for me ;-)   He and family are still there, great guy, nice family.

Two points to consider: (1) The IRS requires that payments received are taxable income for the year in which it is received.  It’s called constructive receipt.  So, you could lose on taxes when taking receipt of a year in advance unless you have other passive activity losses to offset with. In other words, the excess income could exceed all your expenses including depreciation thus causing a taxable event. Do the math first before agreeing. (2) Although, you’re likely a cash basis accounting method taxpayer, you’ll want to treat the advance rent on your balance sheet as an Advance Receipt liability or Unearned Income.  It may help to segregate the funds from other operating accounts and then sweep a rent payment from that other account to your operating account each month that it’s earned.  Good luck!

Michael Noto · Answer

@April Molina I wouldn't even have the conversation about how they plan on paying rent until you run a full credit, criminal, eviction check. Make sure they meet your screening criteria, before you spend time on them.

Most of the time people who have something glaringly bad on their background or credit will try to entice landlords by offering to pay the full year upfront, in hopes they will bend on their screening criteria.

Dooreuhn Cee · Answer

In my experience, these are usually seedy prospects having trouble getting any attention.  Why would anyone with business sense pay a year up front, for a new rental to a stranger.  There is no telling whether the landlord will be savory, if the rental will burn down, or get foreclosed.  Its likely desperation, IMO.

Have you ever had a tenant pay a year in rent up front?

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