Prorated Rent: How to Calculate It and Why It Matters
In residential real estate, prorated rent is a term that describes the amount of money a tenant pays to a landlord for occupying a rental unit for less than a full month.
The concept of prorated rent is central to both landlords and tenants, as each has a financial interest in when it is used and how it is calculated.
Before we describe when prorated rent is used, let’s first look at how it is calculated.
Calculating Prorated Rent
There are three common ways that prorated rent can be calculated, and each of the three will produce slightly different amounts. For the purpose of our calculations, we’ll assume a full month’s rent of $1,000 and that a new lease is to begin on May 15, 2019.
365 Days in a Year
The first typical way to prorate rent is based on a 365-day calendar year. The formula is as follows:
(Number of Days Occupied / 365 Days in a Year) x (Monthly Rental Amount x 12 Months in a Year)
A $1,000 per month lease beginning May 15, 2019 produces the following:
(15 / 365) x ($1,000 x 12) = $493.15
The second way prorated rent is calculated is based on the number of days in a month. The formula is as follows:
(Number of Days Occupied / Number of Days in a Month) x Monthly Rental Amount
Using this method, prorated rent is calculated:
(15 / 31) x $1,000 = $483.87
Finally, some property managers use a 30-day “banker’s month,” regardless of the actual number of days in the prorated month.
(Number of Days Occupied / 30) x Monthly Rental Amount
This produces prorated rent as follows:
(15 / 30) x $1,000 = $500.00
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From a landlord’s perspective, banker’s months will yield the highest prorated rent in every month except February. In a market with rapid turnover, using banker’s months might be a practical way to help offset high vacancy.
However, in more stable markets where tenants tend to stay for longer periods, the significance of strong tenant relationships might dictate using a method more favorable to your resident.
Critical, however, is that landlords are consistent in their application of prorated rent and its calculation. In fact, the formula used should be described in your rental agreement. Inconsistent application of prorated rent could be interpreted as discrimination, which is prohibited by Fair Housing Laws.
From a tenant’s perspective, it’s vital to know that unless it’s stated in the lease or otherwise mandated by state or local law, landlords are not obligated to provide prorated rent.
Why Prorated Rent Matters
Move In/Move Out
The signing of a new apartment lease is the most common scenario in which you might encounter prorated rent. It’s important to know that if a lease begins on the first of the month and you don’t move in until the fifth by choice, the landlord is unlikely to offer prorated rent.
However, if a tenant knows that move-in will occur after the first, it’s essential to request that the landlord begins the lease on the projected move-in date. If the lease begins on the fifth, then the tenant is much more likely to be granted prorated rent for that month.
Prorated rent is most likely to become contentious when a tenant decides to terminate a month-to-month rental agreement. This is because rent is generally due on the first and paid in one-month installments. The landlord is not under any obligation to prorate a tenant’s last month.
For a tenant interested in paying prorated rent for the final month of occupancy, it’s always best to provide as much notice of vacancy as possible and come to an agreement in writing about prorating the final month.
Purchase and Sale of Rental Property
A more nuanced aspect of prorated rent is when investors buy and sell rental property. Most purchase and sale agreements will have a provision that entitles the buyer to receive one month’s prorated rent as of the closing date of the property.
As a buyer, this means the best day to close on your rental property is the first of the month. When you do, you’ll collect an entire month’s rent just for showing up to the closing table! As a bonus, though beyond the scope of this article, closing on the first means that your first mortgage payment will not be due until two months after closing.
However, if you’re selling rental property, the opposite is true: you want to close on the last day of the month. Doing so will minimize the amount of prorated rent you must pay to the buyer at closing.
So there you have it, prorated rent in a nutshell. Some concepts in real estate are complicated and require full-length articles to explain. Coincidentally, explaining prorated rent requires one that’s, well, prorated!
Does this make sense? Do you have any additional questions about prorated rent?
Ask me in the comment section!