On occasions, you may have a tenant who wants to pay their rent in advance. They might want to pay for a month or two, or even as much as the entire term of their lease. It may be tempting to say yes because of the guaranteed cash flow—but is it always a good idea? Here are some things to consider before you agree. Please note that this is for informational purposes only and is not intended as legal or financial advice.
Common Reasons to Collect Rent in Advance
Landlords typically collect rent in advance for the following reasons:
- To safeguard rent payments if the tenant is unemployed or unable to provide proof of income.
- To avoid the hassle of rent collection while guaranteeing rental income.
- To secure rentals that are new to the market or in high demand by identifying tenants who are serious about living at the property.
- To ensure rent is covered when renting to individuals with no rental history (like college students).
The Risks of Accepting Rent in Advance
Clearly, there are some valid reasons to have a tenant pay rent in advance, but there are also a number of risks you should be aware of:
It could be a red flag regarding their income
If a new tenant that you’ve never leased to before requests to pay their rent in advance, it could be because they recently came into a windfall and don’t have a consistent monthly income. If you find yourself in this situation, be extra diligent when evaluating their credit report. You should also conduct a tenant verification to follow up with employers and previous landlords.
Breaking the lease or lease violations
If the tenant violates or breaks the lease and they’ve already paid their rent in advance, you’ll be required to return what remains of the prepaid rent. This means you really shouldn’t spend the rent you’ve received until after the prepaid term. Not only is this inconvenient, but it could also have a financial impact on your business.
No rent increases
If you’ve been considering a rent increase, it will have to wait until after the pre-paid term is over.
It may not be legal
Depending on where your property is located, collecting rent in advance may not be legal. Each state has different laws on rent collection. In some states, landlords can only collect the first months’ rent and a security deposit; others treat upfront rent the same as a security deposit. Some states only allow pre-paid rent if the rent payments are deposited in a trust or escrow account, which can only be transferred to the landlord’s account when the monthly rent is due. Since the laws can vary widely from state to state, it’s essential to check your local laws or consult with a real estate attorney before accepting advance payments.
Advance rent can be harder to keep track of
If you decide to accept rent in advance, it will require more accounting work—especially if you manage multiple properties. If you don’t have a good system in place, it can be difficult to track when the advance rent payments run out.
It could affect your taxes
Advance rent payments are taxable income. If you accept 12 months of rent in November, you’ll have to pay taxes on those payments in April the following year. Unless you have money set aside to cover the additional income, you might take a financial hit when tax season rolls around.
Less interaction with your tenants
Staying in touch with your tenants is important, and rent payments are a good way to do that. Even if you rarely speak to them and only receive rent checks through the mail, monthly checks let you know that your tenant is living at the property and meeting their obligations. There’s also a psychological component: writing monthly rent checks is a good reminder that the home your tenant is living in isn’t theirs, which may encourage them to take better care of the property.
Alternatives to Accepting Advance Rent Payments
If you’ve considered the risks and decided you’re not going to accept advance rent payments, there are other steps you can take to ensure you receive the monthly payments on time.
- Require a cosigner. This is a common practice for young tenants who are renting their first apartment or living with roommates. Co-signers (who are typically parents or relatives) assume financial responsibility for the rent if the tenant defaults.
- Use a rent guarantor service. A rent guarantor service works similarly to a co-signer. If the tenant doesn’t have someone to co-sign their lease, a rent guarantor service agrees to be responsible for the rent if the tenant cannot pay it.
- Get rent guarantee insurance. Rent guarantee insurance protects the landlord if the tenant stops paying by covering up to six months of lost rent per year. This allows landlords to start the eviction process without losing out on months of rental income.
Most landlords and tenants prefer month-to-month payments, so it’s unlikely you’ll have many tenants requesting to pay their rent in advance. Regardless, making it easy to pay rent is one of the best ways to ensure rent collection goes smoothly. Offering several methods for paying rent allows tenants to choose a method that works best for them. Online payments, in particular, can be very convenient for both parties.
If You Accept Advance Payments, Screening is Key
Since there are many risks and disadvantages to collecting rent in advance, many landlords choose not to do it. If you decide to accept advance rent payments, be sure to follow your local laws and document the upfront payment details in your lease. You should also take extra care while screening tenants who make such requests to ensure they have a good rental history and the income to support consistent on-time payments or any other costs associated with keeping the property maintained. Learn how to spot red flags on a tenant screening report here.
Tenant Screening Services offers a variety of screening packages that include credit, eviction, and criminal reports, as well as tenant verifications. Available online 24/7, our services are convenient and easy to use. Order your reports today, or feel free to contact us with any questions you have.
Landlords Property Managers Contact TSCI
