Down side to accepting a full year in Prepaid Rent from tennant?

Question

Does anyone have a bad experience or see any reason not to accept a full year(the lease term) rent payment in advance? This single family home rental will be in AZ. Seems like a great opportunity to me! Also anyone familiar with AZ law know if you are allowed to protect youself from damages from "servcice animals" I read that for pet deposits service animals are NOT pets.

TIA

DJ

TIA

DJ

Mario Valenzuela · Answer

Hello DJ, our legal advisors suggest never accepting prepaid rent. As a policy we don't accept prepaid rent but it is legal to do so if it's done correctly.

Our reasons for not accepting prepaid rent:

1.) Prepaid rent is usually offered to compensate for an applicant being unemployed or not meeting other important criteria such as lack of credit or rental history. This being the case you may be inviting trouble, and if the person is unemployed how will they pay the rent once the prepaid rent is used up?

2.) Prepaid rent is not the landlord's money until the rent is due, each month the landlord would be able to take from the funds, but only as rent is charged. The property management office will have to hold this money in a trust account until it's due to the landlord and adds additional liability to the PM. If anything happens to the tenant such as they pass away or even if they get evicted for material breach, the remaining money would have to be refunded to them.

3.) If the funds are illegal, such as drug money or money owed to the IRS, etc, these funds could be placed on hold or even confiscated by law enforcement. Not all prepaid rent comes from illegal activity, but who has this much money to just give someone to hold, as it doesn't really benefit anyone. The funds are NOT the landlord's and the tenant at anytime can request the funds be returned, and would you know, the landlord would HAVE to return it.

4.) Lastly, paying the rent when it's due is an inalienable right of the tenant. Withholding rent for self remedy is one of the only forms of recourse a tenant has to insure things get repaired as agreed, as a PM you cannot take that right away from a tenant. Prepaying in such a way makes self-remedying by withholding rent difficult for the tenant.

These are our reasons for not accepting prepaid rent, it's not all what it's cracked up to be and can even be a liability. My advice, only rent to applicants that meet your rental criteria and have gainful employment so that you can garnish their wages if they leave you owing money.

Hope this helps!

Nathan Gesner · Answer

A couple things to think about:

1. Many renters will offer to pay rent in advance in an effort to avoid thorough screening. You see the dollar signs and decide to overlook their lack of employment or fail to check Landlord references. I see it all the time.

2. Just because they pay in advance doesn't mean they are good renters. They may be paying in advance to slide under your radar and avoid inspections or communication. As Jay pointed out, there are some bad characters with plenty of cash looking to set up a meth lab or their dog-breeding business.

3. Just because the money is in your bank doesn't mean it's yours to spend! If the tenant breaks their lease six months later, you may have to return the remainder of the rent money. Know your laws!

JD Martin · Answer

I wouldn't do it. Once you accept payment for something you've committed to delivering a product. There's more to a tenancy than just the tenant paying the rent. Let them put the money in some kind of escrow account that pays you every month if they're afraid of having it in their hand.

Most of the time these kinds of offers are from people who can't get any kind of housing elsewhere for whatever reason, are paying with illegitimately gotten funds or have some other issue. Normal people with bank accounts can just set up auto payments and things like that so absence of person isn't really a good excuse unless they're leaving for the Amazon for the next year.

Stephen Brown · Answer

Hello DJ. I think it depends. Is this the rent that they would have paid their previous landlord? Or what's their situation?

Jay Hinrichs · Answer

some of the veteran landlords on this site wont do this for various reasons.

I know we had one back in the illegal grow days and they paid a year in advance and proceed to do 80k in damage.

setting up a grow..  now its legal here basically.. so the other thing would be meth or some other nefarious activity..

John T. · Answer

Whenever a prospective tenant offers of suggests to pay a full year's rent in advance, two things happen:  (1) My Fraud-O-Meter goes off and (2) I ask myself, "What idiot pays a full year's rent up front?"

Over the last year or so I've had 3 or 4 prospective tenants suggest that they might want to pay a full year's rent up front.  None of the prospects got past the inquiry stage.

Remember, a financial confidence artist always plays on the the victim's greed.

Linda S. · Answer

@DJ Roshan,

Check your state laws, in VA it's illegal to accept more than 2 months rent.  I can understand an extra month or so to get ahead, but a year? come on..

To quickly answer your question, you have to think like a human-- not a robot.   WHY would they want to pay a year upfront?  Would you ever ask your bank "can I pay a years mortgage now?"-- it's insane.  1000% NO.

The only reason they do that because they do NOT want to see the landlord, likely for bad reasons to ensure privacy and be under the radar.      You have your money, zero reason to contact them, see them, bother them--  they can and will do whatever they want.  Also, remember one thing... you know your tenant-- you DO NOT KNOW THEIR FRIENDS.   You might have say 10 people planning to stay there, and they just pooled their money together, but put it under the one person with a clean background?      Think people aren't strategic?

I feel like if you rent a full year,  you'll likely be posting next year "never rent to anyone wanting to pay a year in advance"

I only do month to months, and love it because if anything happens-- it's a clean and easy exit.  My tenants are great, and everyone knows the rules!

Aigo Pyles · Answer

Know the law in your state and don't get blinded with the full year upfront payment.

Jim Blackburn · Answer

@DJ Roshan

This here’s a story bout Billy Joe and Bobby Sue....

Cash is king.

Reducing your risk of not receiving rent in the future by 100% sounds like a no brainer to me.

It would take an awful lot to convince me otherwise.

Would you rather have $48,000 cash upfront or $4,000 month by month with the risk that each month moving forward the tenant may either lose his job or spend the money?

Just like the eagles say....

￼￼ https://youtu.be/-WCFUGCOLLU

Got a question?

Just ask,

Jim

Jason C. · Answer

@DJ Roshan

Yeah I wouldn’t accept this personally. I like a rent payment coming in every month to tell me that at the very least, someone still cares enough about my property to at least pay for it. Several properties I have out of town where I haven’t driven by the property in some time so I like that payment to know they haven’t skipped town and left the house open.

Down side to accepting a full year in Prepaid Rent from tennant?

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