Paying for 2 years upfront?

Question

Tenant wants to pay next two years upfront!

What would you say to this?

If i say yes, How do I even go about proper deductions for tax purposes?

The total would be 24,000 on the dot. Paid to me

Nik Corbaxhi · Answer

@Charlie Moore,  I agree with Account Closed on this one. Do a 1 year contract first, and get to know your tenant. If for whatever reason you and dislike each other, you don't have to wait 2 years to get rid of them.

The biggest puzzle to me is the reason tenant wants to pay 2 years in advance? Have you verified income, background check/criminal check?  It is outside of the norm to pay 24k upfront, so I would say there is a catch.

Does the tenant intend to pay you cash? Screen the tenant properly, just like you would screen anyone else and do verification of income, ask for bank statements, pay stubs,etc.

Account Closed · Answer

@Charlie Moore

Never ever start the tenancy this way. After a year or two,... I’d likely consider it. But day 1, no way.

Nathan Gesner · Answer

@Charlie Moore let me rain on your parade.

No intelligent person gives up two years of rent when they could be using those funds to invest or even collect interest in a bank account. When someone offers to pay in advance, it's a big red flag that you shouldn't ignore.

Many tenants will offer to pay in advance or lease for a long period because they want you to get excited about the easy money and ignoring something negative (or maybe not screen them at all). I've screened thousands of applications over the years and in almost every case, they are hiding something. It's like a woman with push-up bras or guys with big trucks that hide their personality flaws.

The other issue is that you can't legally consider that money yours until it's earned. If the tenant pays two years in advance and then breaks the lease four months later, you are obligated to find a replacement tenant and then return any unused portion of the rent. You better hold on to it until it's earned.

Personally, I just screen them like everyone else. If they are approved, they can pay rent like everyone else. I always accept money in advance but I never make special concessions for advanced payments. I also don't rent to people for more than one year because - in my experience - they tend to break the lease early about 90% of the time.

Bob Paxson · Answer

Not positive but you don’t have to pay taxes on the total if you put into escrow account as deferred revenue....if your working on cash basis you get paid when you earn it each month... I would talk to your accountant.

Rick Beno · Answer

I agree with several other posts here. The offer of $24K in up-front cash is a red flag.  Proceed with caution.  If they do pass all of your other screening, then just collect the rent monthly.

Patricia Steiner · Answer

Why does the prospective tenant want to do this?  Is money being laundered through you?  Is he a medical student with two years left on his rotation who is getting money from the Bank of Mom and Dad for his remaining housing expenses?  The advanced rent is not yours - it has to be held in escrow with the security deposit and advanced/applied each month.  So you pay taxes on all of it when received but you hold it in escrow until it is "due/earned" each month - becoming his bookkeeper.  I would have him screened like everyone else, put the money in a separate bank account in his name with an ACH/bill pay to you each month for the rent due.

While it sounds great, paying taxes before the money is yours is not the cruise I would sign-up for and holding money in escrow, geez, how fun is that?  Don't let his issue become yours...

CJ M. · Answer

@Charlie Moore

To each their own. I had one tenant pay 6 months in advance and they were awesome (that timeframe recently ended so they just paid 3 more months in advance). I have another tenant who paid 12 months in advance and they are 6 months into their lease... they'e been awesome too. I have a third tenant who paid 6 months in advance 2 months ago and have been wonderful. All-in-all, that's a lot of capital I've been able to use to grow now...vs. later. Just screen well, keep a hefty reserve, and go with your gut. That's my two cents.

Basit Siddiqi · Answer

@Charlie MooreThe rent paid in advance may be considered taxable in the year that you receive it.

Hai Loc · Answer

One of my biggest mistakes was to accept multi months of rent up front.

I would only consider if it was a foreign student with no credit history and had documentation on school enrollment

Paying for 2 years upfront?

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