Is Accepting Rent in Advance a Good Idea? Property Management in Charleston Has the Answer
When you are a property owner, making money from your rental properties is often the biggest thing on your mind. When renters request to prepay their rent, it is hard to say no. There are lots of reasons why your renters may want to prepay rent.
Some may try to do so in exchange for a discount, while others may simply want to pay ahead to save themselves the trouble of remembering to hand over their rent each month. For property owners, it may seem like a great chance to avoid tracking down rent payments or to pay ahead for your property management services.
Unfortunately, prepaid rent is not the blessing you may think it is. The best property management companies in Charleston do not recommend it. Here are a few things to think about before accepting it.
How Does It Affect Your Taxes?
Think about your taxes and how prepaid rent may affect them. Usually, people report income depending on when they receive it and their expenses. You may have a lot of income for the year, and your business expenses will occur in a different year. Determine whether you wish to have the accounting categories in sync.
Why Are They Prepaying?
This is the first question that comes to mind when a renter requests to prepay their rent. There are lots of reasons and you should ensure that they favor you. If, for example, they have just come into a lot of money, it makes sense that they want to pay several months of rent upfront. If, however, they seem unable to make other monthly payments, this unconventional payment method may not be appropriate.
Do They Want a Discount?
Most renters will request a discount when they want to prepay their rent. Think about it and determine if you are ready to part with five or ten percent just to have a large sum all at once. Some rental owners don’t mind it but others prefer to get the full amount.
Intention to Terminate Lease
Accepting prepaid rent may extend a lease term. For instance, if a renter asks to prepay their rent for the next 6 months, but only has 3 months left on their lease, this will mean you'll need to allow them to extend their lease.
It is not a good idea to accept a prepayment past the end of a lease term if there is any chance you may need to terminate the lease. Some renters will try using this strategy a month or two before their lease termination. By prepaying rent, they will still have somewhere to live at the end of their lease.
Flexibility to Increase Rent
If you accept prepaid rent, you take away your ability to increase rent in the coming months. You will be agreeing that the renter can pay at the existing rates for the months they have prepaid. Most property owners enjoy the flexibility of revising rent to reflect market changes. They avoid renters’ tactic of using prepay to lock them into a certain rate.
Intention to Sell the Property
Accepting prepaid rent may not be a good idea if you plan on selling your rental property soon. It will slow down your deal since buyers and sellers have to honor existing lease agreements. Once a property owner accepts rent from a renter, the lease is extended and its terms have to be honored. Buyers, on the other hand, want to move in right after closing.
If a property owner accepts prepaid rent, they may soon have multiple renters wishing to prepay. Keeping track of their payments can become a major challenge. The property investor may have no choice but to seek the help of property management companies in Charleston or bookkeepers.
What If They Break the Lease?
As most property owners already know, renters break their lease more often than expected. Before accepting their prepaid rent, establish what would happen if they choose to leave early. If your lease doesn’t have an early termination clause to explain how you can handle such situations, you may find yourself in a pickle.
Can They Pay If You Renew Your Lease?
If a renter is prepaying because they recently received an inheritance or large sum, find out if they will be able to keep paying once the lease is renewed. No property owner wants to deal with evictions or renters who won’t pay on time. Unfortunately, a large, one-time payment is not enough to trust a renter, especially if they are new. Consider working with property management companies in Charleston to determine if they are good renters. They can help you reduce the turnover costs of lease renewal and evictions.
Should You Allow Renters to Prepay on Their Rent?
The issue of prepaid rent does not have a one-size-fits-all answer. Like most real estate issues, the answer depends on your personal situation and needs. While some property owners will enjoy up-front rent payments, it isn’t suitable for most of them.
Contact us to learn more about how prepaying rent, screening renters, and other strategies for managing your rentals