Every once in a while, you'll get a tenant who wants to pay rent in advance. It might be a month or two at once, or they may want to pay for their full lease term entirely up front.
Either way, you have some things to think about. While we'd all like a little more cash flow in our lives, the truth is accepting advance rent is a risky move.
Has your tenant asked if they can pay up front for several months at once? Here are six things to think about before agreeing.
1. It calls their income into question
If this is a new tenant you've never leased to before, consider the request a red flag. If they want to pay for six months upfront, is it because they just came into a windfall? Does that mean they don't have consistent monthly income of their own?
If you're in this situation, be extra diligent in evaluating their credit report, following up with their past landlords, and calling employers on the tenant's application. You want to be 100% sure they have the income to pay their bills down the line.
2. It could impact your taxes
All those advance rent payments are taxable income. So if you accepted 12 months of rent in November, you'll need to pay taxes on all those payments come April. Unless you've been stowing away extra cash just in case, that likely means a pretty big financial hit once tax season rolls around.
3. You might be violating state law
Every state has different laws regarding rent collection. In some, you can only collect the first month's rent plus a security deposit. In others, it may be a few months more. Before you accept advance rent, always check with a local real estate attorney and make sure you understand the laws in your area.
4. You'd have to pay it back if they violate the lease
Even if you do accept advance payments, you can't really spend them. If you're forced to evict the tenant or otherwise terminate the lease, you'll need to refund the money for any unused months in full. Depending on what your rent's set at, that could amount to a pretty large chunk of change.
5. It's hard to keep track of
Accepting advance rent requires more accounting work -- especially if you have multiple properties and tenants you're dealing with. If you're not careful, you could even lose track of when those advance payments run out and rent's due again.
6. There's less interaction between you and the renter
Collecting rent is a good way to keep in touch with your tenants. Even if it's just a quick handoff in the hall or a check in the mail, you know the tenant is in the home and meeting their obligations as a renter. Psychologically, writing that rent check also reminds the tenant that the home isn't theirs, which may encourage them to take better care of the property (hopefully).
The bottom line
There are very few perks to accepting advance rent -- especially with a new tenant. Before agreeing to such an arrangement, talk to a real estate attorney and your accountant to be sure it's the right move for your business. You should also take extra care in screening the tenant to make sure they have the income to support future rent payments, utility bills, and the costs of maintaining the property.