In some situations, it might be best for a tenant to pay a lump sum in advance toward their rent. This is convenient for the tenant, as it allows them to not have to worry about paying rent for a while if they have the funds available. However, when tenants pay rent in advance, certain issues can arise for landlords that might make it a bad idea.
Circumstances for Accepting Rent in Advance
First of all, why should landlords ever go against their proposed payment schedule and accept rent in advance in the first place? There are a few situations in which rent payment in advance might make sense.
If a new tenant is currently unemployed but is actively seeking employment, payment in a lump sum can ensure that the rent is paid while the tenant finds a job. Additionally, rent collection every month can simply be a hassle, so taking care of multiple months at a time can be more convenient.
In some cases, landlords will ask for a lump sum to secure a tenant’s claim on a property if there are multiple applicants. This will prove to the landlord that the tenant is serious about moving in. Landlords will also sometimes ask for multiple months of rent upfront from new tenants who don’t have any rental history.
What Are the Risks?
Though there are understandable reasons why a landlord might want to ask for multiple months’ rent in a lump sum or a tenant might ask for such an arrangement, there are also some risks involved with accepting rent in advance. As a landlord, it’s crucial that you understand all sides of a situation before choosing one path or the other.
It Doesn’t Allow for Rent Increases
Depending on when you ask for the lump sum and how many months in advance it covers, it may extend past the point at which you could legally ask for a rent increase from your tenant. That means your tenant could technically be getting a deal on cheaper rent, and you could be missing out on a monthly increase just because you allowed them to pay in advance.
You’ll Pay More in Taxes
The rent you’re paid by tenants is taxable income. You’ll pay taxes on all of the rent you’re paid in a year, even if that rent is being put toward your renter’s tenancy on the property past the end of the fiscal year. This way, you end up paying more in taxes in a given year than you technically should be responsible for.
It Might Go Against Local Law
In some states, landlords aren’t allowed to collect any more than the first month’s rent, last month’s rent, and the security deposit at one time. Make sure you brush up on local regulations before accepting rent in advance.
It Could Cause Issues with Lease Violations
If you accept a large amount of rent in advance from a tenant, and then they violate the terms of their lease or even break it early, you’ll have to deal with returning the amount that they prepaid. In many cases, landlords and tenants can get into disputes about how much the tenant is owed back in prepaid rent.
Are There Alternatives to Tenants Paying Rent in Advance?
If you were planning on accepting rent in advance as a way to guarantee that the rent is paid, there are other ways to provide yourself with that assurance as a landlord.
Rent Guarantor Services
Rent guarantor services are like co-signers for tenants who don’t have anyone who can co-sign. Tenants pay a fee for these services to ensure that the guarantor will pay their rent if they are unable to.
If your tenant is young and doesn’t have much rental experience, you can require a parent or relative to co-sign in order to ensure that the rent gets paid if they are short on funds.
Rent Guarantee Insurance
Rent guarantee insurance is a service for landlords that covers their rental income in the case that the tenant can no longer pay. This type of insurance can cover as many as six months of unpaid rent in a single year and can provide landlords with financial support while they pursue an eviction.