You’re probably thinking about collecting advanced rent payments from your tenants, but it can be more of a challenge than you think. Some pros and cons come with accepting rent in advance. Understanding these contrasting elements ensures you are equipped to make a more informed decision that is beneficial for both you and your tenants.
What is an Advanced Rent Payment?
Advanced rent payment is any payment that covers—at a minimum—the next month’s rent. Whether it be two months or more of rent, any additional payments would also be an advanced payment from the tenant to the landlord.
Pros and Cons of Accepting Rent Payments in Advance
There is no right or wrong decision in this situation. The choice you make now is not set in stone. As a landlord or property owner, you have the flexibility to change your decision at a later time. The great thing about being a landlord or property owner is that you have the flexibility to change your decision later down the line. Just do what is best for you and your tenants.
Pros of Accepting Rent in Advance
Every landlord-renter relationship is different, so having a tenant pay rent in advance is not a one-size-fits-all solution for everyone. Property owners and their occupants have to decide based on their situations. Here are four general benefits you can gain from collecting early rent payments.
1. Simplifies rent collection
Most landlords can agree the easier it is to collect rent, the better. The traditional one-payment-a-month model can be a challenge and slow down critical home repairs and maintenance. Advanced rent payments are simpler to manage because you’ll have months of rent at once, easing that tension and preparing you ahead for any upcoming costs.
2. Encourages shorter rental vacancies
If your rental is new or in a popular area, you can leverage the high demand to ask eligible tenants to pay the rent upfront. This can eliminate specific candidates, fill the vacancy quickly, and secure guaranteed rental income for you. Shorter rental vacancies mean more money in your pocket.
3. Helps renters who lack rental history
Not every prospective tenant has a long track record as a renter. Some people may be recent college graduates or decide to stay at home longer until they are finally ready to leave the nest. While historical evidence showing that someone is a good renter is undeniably helpful—you shouldn’t solely rely on it for every situation. Instead, ask for a few months of rent in advance—helping you protect your property while still giving new renters a fair chance.
4. Safeguards rental payments
Life can be unpredictable, and some tenants may not fit all your criteria for the “perfect renter.” Tenants may not have income proof or are unemployed because they’re transitioning between jobs. Don’t write them off just yet. If these tenants can pay several months of rent in advance, that safeguards your payments while still providing them with a chance at your rental property. They’ll also have some time to find their next source of income with less pressure.
Cons of Accepting Rent in Advance
Just as there are pros to accepting rent in advance, there are also some essential cons you’ll want to know about. It’s good to be aware of the drawbacks so you can have a complete perspective before you make a decision. Here are five notable disadvantages to consider.
1. Taxable Income
Unlike monthly rent payments, any rent you receive in advance from your tenants is taxable income. In most cases, you will pay taxes for the year you collected the early rent payments. For example, if you collect rent from a tenant in November—covering December to April—then you will pay taxes on those advanced payments for the current year and not the tenancy year.
2. Lease agreement violations
Sometimes tenants get themselves into challenging situations—like breaking or violating the lease agreement. Under these circumstances, the tenant may even lose their tenancy. If this is the case and the tenant already made advanced rental payments to you, then you would have to pay the remaining amount back to them.
3. State laws that hinder advanced rent collection
The logistics of an advanced rent payment vary across the nation. Some states only allow you to collect rent in advance if you deposit the payments in an escrow or trust account. Only when the monthly rent is due, can you transfer the money to your account. This process not only requires additional bookkeeping and micromanagement, but you're also delayed in how quickly you can access and then use the funds.
4. You cannot increase their rent
Once a tenant pays their rent in advance, they’re locked in at that rate. You cannot change the rent price if the tenant has already made their payments at the amount that you both contractually agreed upon. This is unlawful. You’ll have to wait for the lease to expire before you start raising the rent.
5. Lack of income to cover later rental dues
Accepting rent from tenants in advance may seem like a picture-perfect dream scenario, but there is always the possibility that it could backfire. Some renters may not be able to make their monthly rental dues after the advanced payment period ends. The only way to guarantee this does not happen is if the tenant pays for an entire year of rent in advance.
Other Ways to Guarantee Rent Payments
As a landlord or property owner, it is your right to determine if accepting advanced rent payments is right for your business. If you still want some guarantee that you’ll receive your rent on time every month, here are a few solutions you can try.
Rent guarantee insurance
Rent guarantee coverage is a type of insurance that covers your rental income if a tenant stops paying you. The great benefit of this insurance is that it can protect you for up to six months of missing rent. This ensures that you’ve got ample time to take appropriate action against your tenant (like starting the eviction process) without losing out on critical funds.
Co-signer
Think of a co-signer as a human safety net—a person that assumes secondary responsibility for rental payments. This is the individual (usually a family member or relative) you will go to if the primary tenant defaults on their rent or only makes inadequate partial rent payments.
Rent guarantor service
Some tenants don’t have a co-signer or another person they trust with their tenancy. This is a difficult situation to be in, especially if the landlord requires that they have a co-signer to qualify. That's where a rent guarantor comes in. This person will act as the tenant's co-signer and cover the rent if the tenant ends up in a situation where they cannot pay it themselves.
Additional Questions
We understand that you might have a few more questions that need answering. We’ve gathered some of the most common questions and answers to help you make a more informed decision.
Should you offer a discount for advance rental payments?
If providing a discount doesn’t affect your wallet, it could be a viable strategy. This incentive may encourage renters to pay several months of rent at once, ensuring that you’ve got secured funds and no concerns about rent collections.
If rent is paid in advance (in full) do you still need to run a background/credit check?
Yes, yes, and yes. Even if the tenant pays the full amount of their rent in advance, running a background or credit check is vital. While a background or credit check isn’t the end-all-be-all to a tenant’s candidacy, they may be able to save you money and stress later down the line.
An Easier Solution to Collect Rent in Advance
Now that you know about the benefits and drawbacks, we’ve got an easy solution for you if you decide to collect rent from your tenants in advance. Whether it’s receipts for repairs or documenting rental income, keeping everything organized for tax season can be a headache. Luckily, Apartments.com has a great solution. Our expense tracking platform helps you summarize rental expenses by property and tax category. From there, you can easily export them to CSV or PDF formats to make doing your taxes a breeze. Unlike our competitors, there’s no need to go off-site to a third party for required forms. With Apartments.com, you can download the required tax filing forms directly from your account, and they are backed up for seven years.
