Rental Management keeping year lease payment

Huntsville, Alabama
General Real Estate Investing
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Rental Management keeping year lease payment

Michael Hansen
Investor · Madison, AL · Member since 2020 · 40 posts · 26 votes

I have a SFR in Cullman, AL. The new tenant paid a year's lease. My rental property management company is keeping this cash and disbursing the rent in monthly checks. Is this normal?

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Adam Martin
Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
1y

I'm not sure but I think it is probably a good idea on their part.  The pre-paid rent still technically belongs to the tenant and if they break the lease you are going to have to try to re-rent and then give them back their money for the months you had it re-rented minus your expenses.  They don't know you well enough to know if you will be able to give the refund so they are most likely holding it in escrow to ensure the money doesn't get spent and then all of a sudden they leave and there is no money to pay them back with a costly legal bill I'm sure.  Pre paid rent isn't as big of a benefit as people like to believe and hopefully they didn't accept a less than qualified tenant as that is who typically is offering it.  

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  • Adam Martin
    Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
    1y

    I'm not sure but I think it is probably a good idea on their part.  The pre-paid rent still technically belongs to the tenant and if they break the lease you are going to have to try to re-rent and then give them back their money for the months you had it re-rented minus your expenses.  They don't know you well enough to know if you will be able to give the refund so they are most likely holding it in escrow to ensure the money doesn't get spent and then all of a sudden they leave and there is no money to pay them back with a costly legal bill I'm sure.  Pre paid rent isn't as big of a benefit as people like to believe and hopefully they didn't accept a less than qualified tenant as that is who typically is offering it.  

    4Reply
  • Michael Hansen
    OP
    Investor · Madison, AL · Member since 2020 · 40 posts · 26 votes
    1y

    Thanks, I never heard of a tenant paying a lease up front.  

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  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    1y

    Laws prevent distribution of rents until they are realized. Most leases are written monthly and therefore advanced rents sit in an escrow account. Every month the monthly rent is taken out of escrow and paid to the owner. Although, a lease could be written differently we have never, nor have I ever heard of anyone doing it differently. 

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  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    1y

    @Michael Hansen most states have laws about when rent is earned versus paid.

    Any PMC that knows the law will do exactly what your PMC is doing.

    Think of it this way - let's say the PMC forwards all the rents immediately to an owner. What happens if the property becomes uninhabitable and the PMC is legally required to refund the unearned rents and the OWNER refuses to send the money to the PMC? The owner will be opening themselves to a lawsuit, but they will also be exposing the PMC to that same lawsuit.

    Why would a PMC take on this type of risk?

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  • Michael Hansen
    OP
    Investor · Madison, AL · Member since 2020 · 40 posts · 26 votes
    1y

    Thanks.

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