Collecting monthly rent payments on time will help improve the ROI of your rental property. Most landlords collect rent once a month, but occasionally a tenant will ask to pay the rent in advance instead. Should property owners allow tenants to pre-pay rent?
Knowing whether to accept prepayment is something the best property management companies can help you with! There are legitimate reasons why prepayments can be good. However, there are also some unscrupulous reasons for tenants to ask to pay rent upfront. Let's look at why a tenant might want to pay upfront and why it might not be a good idea for a property owner.
What Should Property Owners Consider Before Accepting Prepaid Rent?
Property owners must consider the benefits and potential consequences of accepting pre-paid rent. From questionable tenant behavior to your taxes, property managers recommend thinking through the following issues.
Can Your Tenant Afford to Pay?
Asking to pay the rent upfront could be a warning sign, especially for a new tenant. On the other hand, it's possible the tenant had a recent stroke of luck and has a chunk of cash now—but not enough to pay bills several months from now.
Atlanta property management companies suggest being extra careful when looking at a prospective tenant's credit report if this happens to you. Also, follow up with past landlords and employers. Make sure that a new tenant can pay all their bills, not just now but in the future.
Check With Residential Property Managers to See if You're in Violation of a Law
State laws vary when it comes to collecting rent. In some situations, you may only be able to collect the first month's rent plus a security deposit. It's a good idea to contact a real estate attorney who can advise you. A professional property management company that knows the area near the rental property should also help guide you through state laws and regulations.
You Might Have to Pay More In Taxes
Since rent payments are taxable income, it could affect your tax bill depending on when the prepayment is made. Property management experts can tell you that additional accounting work is required to track the money accurately for expenditures and the IRS. For example, if you accept 12 months of rent in advance in October, you will have to pay tax on the whole amount when you file taxes in April of the following year.
To understand your tax responsibilities with pre-paid rent, work with your accountant and residential property managers to avoid taking an unexpected blow to the pocketbook during tax season.
You Don't Always Get to Keep Upfront Money
Even if you take advance payments, spending it all right away can later put you in a bind. If you're forced to evict the tenant or terminate the lease, you'll have to fully return any remaining money collected for months beyond the end of the lease. That could be a significant sum of money depending on the rent amount. So when accepting pre-paid rent, make sure to apply appropriately month-by-month to your budget.
Monthly Rent is a Way to Stay in Contact
An Atlanta property management company knows that collecting rent on a monthly basis is a valuable method to stay in touch with your renters. Whether it's a check in the mail or a drop-off at your office, you know your tenant is fulfilling their responsibilities. Paying rent (even if it's online) also impacts a renter's mindset, reminding them that they have a monthly obligation throughout the lease.
When Is Upfront Rent Okay?
When a tenant wants to pay upfront, there could be a legitimate reason. For instance, they might travel frequently. Paying for a few months in advance helps them with one less worry while they're away.
If you and your property manager have screened the tenant, and everything looks good, there are a few options instead of collecting all the money at once.
- Ask for someone to co-sign the lease. If a tenant rents their first home after moving out of their parent's house or dorm, they might prefer to pay upfront until they build up credit. A co-signer takes on the financial responsibility if anything were to prevent the renter from paying monthly after the upfront amount runs out.
- Get rent guarantee insurance. Landlords can cover lost rental income through an insurance company. Most insurance policies cover lost rent for six months each year of the lease.
Check with a residential property management company to discuss which of these options makes the most sense for you and your rental properties.
An Atlanta Property Management Company Advises On Rent Collection Options
While there are legitimate reasons why prospective tenants would want to pay upfront, it's not always the best choice for property owners. Investors should consider pre-paid rent carefully and ask for input from professionals who have experience with renters who ask to pre-pay the rent a few months at a time.
What does a property manager do? Revolution Rental Management helps property owners with these kinds of rent collection decisions. Reach out to learn more about our residential property management services!
Ready to grow your portfolio? Download our free guide, "Real Estate Investing: Grow Your Portfolio!"