tenant paying 1 year rent in full, good or bad?
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Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
7y@Jason D. That is not a true statement. Most rental agreements state that if the tenant violates the lease agreement, they still owe the remainder of the rent for the agreed term, usually 1 year. If the contract is for 1 year, and they have already paid for 1 year, they still have to abide by the rental agreement. Contract law.
63 Replies
- Ephrata, PA · Member since 2019 · 40 posts · 11 votes7y
I've known a few individuals who would pay their utilities a year at a time but never rents. With utilities the company would make sure they had a baseline of costs to estimate your consumption (in this example electric bills for the previous two years) and then if you consumed less than the estimate they actually sent you a check at the end of the year and if you had consumed more than the estimate you would just owe the difference. The company encouraged this and gave a 10% discount for paying a full year in advance if you met their criteria for an established baseline etc. so it was a win-win situation.
If I was the owner with someone wanting to rent from me and pay a full year I would require a "baseline" to qualify which would probably be something along the lines of renting for at least 1 full year previously with no issues. I'd also ask them a few general questions about why they want to pay upfront to have a better understanding of the situation they're in.
If you're comfortable with it then money now is better than money later so you can use that money to reinvest. - 7ySimon W.Business MemberReal Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 678 votes
Why is everyone making such a big fuss about this?
You do not need to switch your whole accounting basis to accrual if you are cash just because a tenant decides to PREPAY.
No need to open a separate bank account for it.
1. Deposit money into your operating account
2. Record the receipt as Prepaid Rent
3. Post monthly charges each month and it would draw on the prepaid balance.
The prepayment would be marked against Liability account on the balance sheet, not the P&L.
Take it this way, if you have 100 tenants and 1 tenant decides to prepaid 1-2 months in advance, are you going to put that money in a separate account and change your basis to accrual?
- Rental Property Investor · Corpus Christi, TX · Member since 2018 · 2 posts · 0 votes7y
I had a tenant do this at one of my rentals. She was approved by a top rated PM company in San Antonio... whom proved to be very slow in taking preventative action. 4 months in, the neighborhood watch group had called me twice about activity. After following all legal processes for entry, we found she was involved in illegal activity and had unapproved tenants staying there. She was eventually evicted, but it was a process. She left unpaid utility bills, every window broken, and a mess....requesting her security deposit back. I'd say be careful with taking the full monies up front. Consider the escrow route.
- 7yWalker KirkikisPro MemberDeveloper · Chicago, IL · Member since 2015 · 21 posts · 10 votes
@Yu Chen Most of the time this is a red flag as I have been in the rental real estate industry for a bit. I would do a couple of things that can make sure you are covered:
1. Complete Criminal, credit, eviction check, landlord references (dive 2-3 landlords back in the past.) to even see if they qualify for the unit!
2. If they qualify, Know the laws on how much you are able to collect from the tenant.
3. Once you know the law, make sure the lease clearly states the information.
4. Check the lease over with attorney.
Keep it simple! No reason to think of all the possibilities if they can’t qualify with your credit, criminal, eviction screening first! Good Luck!
- Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes7y
Originally posted by @Simon W.:
Why is everyone making such a big fuss about this?
You do not need to switch your whole accounting basis to accrual if you are cash just because a tenant decides to PREPAY.
No need to open a separate bank account for it.
1. Deposit money into your operating account
2. Record the receipt as Prepaid Rent
3. Post monthly charges each month and it would draw on the prepaid balance.
The prepayment would be marked against Liability account on the balance sheet, not the P&L.
Take it this way, if you have 100 tenants and 1 tenant decides to prepaid 1-2 months in advance, are you going to put that money in a separate account and change your basis to accrual?
Everything you just said is changing from cash to accrual method of accounting
Cash method = revenue when cash is received, therefore when the $ is received
Accrual method = putting a liability on the books and recording revenue when earned
- 7ySimon W.Business MemberReal Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 678 votes
Originally posted by @Chris Purcell:
Everything you just said is changing from cash to accrual method of accounting
Cash method = revenue when cash is received, therefore when the $ is received
Accrual method = putting a liability on the books and recording revenue when earned
What I said is not accrual method.
Cash method = revenue when cash is received and expenses paid when money goes out
Accrual method = revenue earned regardless if you received cash or not, expenses recognized when work has been done or billed regardless if you paid or not.
Just because someone prepays doesn't make it an accrual basis, all prepaid rent income is a liability, and all prepaid expenses are assets.
So if you are on a cash basis, and a tenant prepaid 1 month, are you going to your CPA to tell him to switch to accrual method because 1 of your tenants prepaid you?
- Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes7y
Originally posted by @Simon W.:
Originally posted by @Chris Purcell:
Everything you just said is changing from cash to accrual method of accounting
Cash method = revenue when cash is received, therefore when the $ is received
Accrual method = putting a liability on the books and recording revenue when earned
What I said is not accrual method.
Cash method = revenue when cash is received and expenses paid when money goes out
Accrual method = revenue earned regardless if you received cash or not, expenses recognized when work has been done or billed regardless if you paid or not.
Just because someone prepays doesn't make it an accrual basis, all prepaid rent income is a liability, and all prepaid expenses are assets.
So if you are on a cash basis, and a tenant prepaid 1 month, are you going to your CPA to tell him to switch to accrual method because 1 of your tenants prepaid you?
How is your example of deferred income not accrual basis of accounting
- Realtor · Memphis, TN · Member since 2018 · 19 posts · 9 votes7y
@Nick Ferrari
Nope in Tennessee TREC rental agreement shows the resident is responsible for the remainder of their lease. It is also common law in the state of Tennessee which supersedes the lease if push comes to shove in a court room. I represent a property management company in court on a weekly basis, unfortunately.
- 7ySimon W.Business MemberReal Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 678 votes
Originally posted by @Chris Purcell:
Originally posted by @Simon W.:
Originally posted by @Chris Purcell:
Everything you just said is changing from cash to accrual method of accounting
Cash method = revenue when cash is received, therefore when the $ is received
Accrual method = putting a liability on the books and recording revenue when earned
What I said is not accrual method.
Cash method = revenue when cash is received and expenses paid when money goes out
Accrual method = revenue earned regardless if you received cash or not, expenses recognized when work has been done or billed regardless if you paid or not.
Just because someone prepays doesn't make it an accrual basis, all prepaid rent income is a liability, and all prepaid expenses are assets.
So if you are on a cash basis, and a tenant prepaid 1 month, are you going to your CPA to tell him to switch to accrual method because 1 of your tenants prepaid you?
How is your example of deferred income not accrual basis of accounting
My bad - I meant to say that the Prepaid rent doesn't touch the Balance Sheet and will only show on the P&L, not the other way around. Prepaid rent would be revenue in the P&L statement. It would be the same category as Revenue. Prepaid rent gets reduced each month, but it's not a liability under cash basis.
However, in the real world, it's a liability just not under the cash basis method.
But again Prepaid Rent Income does not automatically put them into accrual method.
I personally prefer to stay in the cash basis method.
- 7ySteve RozenbergPro MemberSpecialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
@Yu Chen
I would run it business as usual. It is not that uncommon for people to pay a year in advanced. We run our standard policy and background check and if everything is inline with our policy and procedure then we go ahead. If they don’t then it’s simple
If you do not accept them I would caution you to make sure there is a reason listed in your policy manual stating why you denied them... other then they had a lot of money
- Phoenix, AZ · Member since 2017 · 18 posts · 22 votes7y
Originally posted by @Anthony Dooley:
Thanks @JD Martin, but if the tenant violates any part of the lease, they have, in fact, terminated the lease agreement. Your personal opinion does not count.
Incorrect, violating a lease is not the same as terminating a lease. Any number of events could cause a tenant to violate a lease, either accidentally or intentionally. If it automatically terminated the lease you would have to resign a brand new lease every single time your tenant did something wrong. Can you imagine the nightmares of needing to resign a new lease every single time your tenant invited their girlfriend to move in without your approval, or they tried to sneak an unauthorized pet past you, or they made an alteration to the house without your written approval etc etc. The tenant may have violated the lease, and that violation may be grounds for eviction if the landlord chooses to, but eviction is initiated by the landlord not the tenant. Therefore it is the landlord who is the one terminating the lease based upon a previous violation by the tenant.
Secondly, in your personal example of someone who dipped out and abandoned the property. Of course you could keep charging them, just because they physically left the premise doesn't mean that their lease suddenly stopped being valid. Their lease was valid whether they lived in the house or not, therefore they are on the hook for paying regardless if they live there or not.
Most states also require that you hold onto abandoned property for at least 30 days, and make reasonable efforts to find the tenant. If you did not hold onto the person's belongings you could have easily been sued for that "rolex watch" they had left sitting on the kitchen counter.
And finally, state and federal law will always trump whatever verbiage you put into a contract. If the law says you keep the money, then you keep it, if the law says you have to refund the money then you have to refund it. The only time it would matter about what your lease contract said is if the law didn't already specifically cover the circumstances in question, however I guarantee you that every state will already have rules about who gets to keep the deposits. A contract that contains language contrary to what the law says is automatically void and unenforceable.
*I am a licensed lawyer, however I am not your lawyer. No legal advice given.
- Whittier , CA · Member since 2013 · 176 posts · 96 votes7y
I mean the whole point is to make money right?
RUN Background/credit (nothing too scary?)
Collect the money!!!
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