All Cash Offer for Entire Lease Upfront - Good Idea?
Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes
All Cash Offer for Entire Lease Upfront - Good Idea?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4yTwo things:
1. Paying up front is a red flag. Or at least a yellow flag. Many people wave cash to get a Landlord excited, hoping you'll skip the background check, offer a discount, or move them to the front of the line ahead of more qualified applicants. It should get your hackles up.
2. The money is not technically yours to spend until it's earned, and it's not earned until it's applied to the monthly rent charge. Say a tenant pays on January 1 for the entire year. The only amount you've earned and can spend is the January rent. February rent isn't earned until February rent is charged on February 1st. If the Tenant decides to break their lease after three months, you are legally obligated to find a new renter and then refund any unused portion of rent to the departing tenant. If you've already spent $15,000 and the tenant is owed money back, you'll be stuck borrowing.
Most experienced Landlords and Property Managers will tell you to be careful with this. There are tenants that pay for the full year in advance for various reasons, but I think a larger percentage does it with bad intentions.
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14 Replies
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Two things:
1. Paying up front is a red flag. Or at least a yellow flag. Many people wave cash to get a Landlord excited, hoping you'll skip the background check, offer a discount, or move them to the front of the line ahead of more qualified applicants. It should get your hackles up.
2. The money is not technically yours to spend until it's earned, and it's not earned until it's applied to the monthly rent charge. Say a tenant pays on January 1 for the entire year. The only amount you've earned and can spend is the January rent. February rent isn't earned until February rent is charged on February 1st. If the Tenant decides to break their lease after three months, you are legally obligated to find a new renter and then refund any unused portion of rent to the departing tenant. If you've already spent $15,000 and the tenant is owed money back, you'll be stuck borrowing.
Most experienced Landlords and Property Managers will tell you to be careful with this. There are tenants that pay for the full year in advance for various reasons, but I think a larger percentage does it with bad intentions.
The DIY Landlord Book4.7248 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
It's usually a red flag when they want to pay up front. Ask them why, and why they wouldn't just pay monthly. Who knows where that cash came from, they have leverage throughout the entirety of the lease when it's paid in full.
- Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes4y
Most property managers and landlords (myself included) consider this a red flag VS a good deal. Often times (although not in your case by what was said) they will ask for a discount or a deal of some sort. No SD or lower SD etc....
In those cases it is 100% no for us. Never going to give a deal for cash up front because it isn't cash up front for the manager/landlord legally. Any prepaid rent needs to go into your escrow account and only be paid out monthly when it is due. Doing anything else with it will get you in hot water. Also, if the tenant leaves early this causes issues for some landlords as they haven't followed the rules and now they have to figure out how to pay it back.
This isn't a 100% no for us, but a proceed with caution, follow the law (as you always should of course) and do all of your checks per normal. Because they are offering cash up front and that is a red flag, I would scrutinize them more carefully as we would anyone who had a red (or yellow as the great @Nathan Gesner correctly said) flag pop up.
- Real Estate Broker · Austin, TX · Member since 2022 · 89 posts · 93 votes4y
I respectfully disagree with the above comments that it's always a red flag. You will 100% want to do standard tenant screening to verify credit score, income, employment, background check, etc. However, there are many jobs where income is variable (such as real estate) and some renters may feel a peace of mind and stability paying up front while they have the cash readily available. I personally know 2 different Realtors who have requested to do this for their landlords. They have excellent tenant criteria and references, etc - you would be thrilled to have them as a tenant. However, many landlords viewed them paying a year up front as a red flag as well and would not rent to them. In one situation, the Realtor had just gotten divorced and sold their home so he had a large lump sum and wanted to just pay for an entire year of rent so he could focus on getting back on his feet and have one less thing to worry about. It's not because he couldn't just manage that cash himself and pay it monthly. It was just a simpler solution for him personally.
If the tenant passes all the standard screening checks with flying colors and can show POF, I would personally consider accepting a year up front.
I would recommend holding this money in a separate account for your property.
Best of luck with whatever you decide. Just hoping to share a different viewpoint on the situation. :) - Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
Thanks for the reply. To give a little more context, there is a family that is moving from my street to another state but their son is staying here. They sold there house and he would like to stay in the area. I have not even listed the apartment yet for rent.
I do appreciate the information you gave though and I'll take all of that into consideration. Thank you!
Quote from @Nathan Gesner:
Two things:
1. Paying up front is a red flag. Or at least a yellow flag. Many people wave cash to get a Landlord excited, hoping you'll skip the background check, offer a discount, or move them to the front of the line ahead of more qualified applicants. It should get your hackles up.
2. The money is not technically yours to spend until it's earned, and it's not earned until it's applied to the monthly rent charge. Say a tenant pays on January 1 for the entire year. The only amount you've earned and can spend is the January rent. February rent isn't earned until February rent is charged on February 1st. If the Tenant decides to break their lease after three months, you are legally obligated to find a new renter and then refund any unused portion of rent to the departing tenant. If you've already spent $15,000 and the tenant is owed money back, you'll be stuck borrowing.
Most experienced Landlords and Property Managers will tell you to be careful with this. There are tenants that pay for the full year in advance for various reasons, but I think a larger percentage does it with bad intentions.
- Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
@Eliott Elias thanks for the information. Do you mind expanding on what you mean by having leverage throughout the lease? Or was that captured in what Nathan was speaking about in his reply. Thanks!
- Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
Thanks Scott! I appreciate all of the information. I gave a bit more context to what Nathan had mentioned. It's a unique situation where I didn't even have the property listed they just knew I was going to be renting soon because they live on my street currently. I will take all of this into consideration but agreed, I always try to make sure to follow any laws and process needed for a successful tenant. Thanks again.
Quote from @Scott M.:
Most property managers and landlords (myself included) consider this a red flag VS a good deal. Often times (although not in your case by what was said) they will ask for a discount or a deal of some sort. No SD or lower SD etc....
In those cases it is 100% no for us. Never going to give a deal for cash up front because it isn't cash up front for the manager/landlord legally. Any prepaid rent needs to go into your escrow account and only be paid out monthly when it is due. Doing anything else with it will get you in hot water. Also, if the tenant leaves early this causes issues for some landlords as they haven't followed the rules and now they have to figure out how to pay it back.
This isn't a 100% no for us, but a proceed with caution, follow the law (as you always should of course) and do all of your checks per normal. Because they are offering cash up front and that is a red flag, I would scrutinize them more carefully as we would anyone who had a red (or yellow as the great @Nathan Gesner correctly said) flag pop up.
- Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
@Celine Crestin Thanks for your response. I appreciate your point of view on this. I think one thing that is very common across all of the responses so far is continuing to make sure I follow my processes setup for screening and lease agreements etc. I'll keep all of that in mind moving forward. Appreciate your response!
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
Quote from @Anthony Simboli:
@Eliott Elias thanks for the information. Do you mind expanding on what you mean by having leverage throughout the lease? Or was that captured in what Nathan was speaking about in his reply. Thanks!
The biggest problem with letting someone pay up front for a year, is that it's really hard to kick them out, if things go wrong. Depends on what your risk tolerance is, but people who usually pay up front can not get past a landlords screening process. Often poor money management.
- Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
Absolutely, makes sense. They wanted to have a cosigner to start but they were just providing some options for me to think about. Again, its a unique situation where they live on the same street and the parents are moving to another state and the son is staying here for work/school. Thanks for your help!
Quote from @Eliott Elias:
Quote from @Anthony Simboli:
@Eliott Elias thanks for the information. Do you mind expanding on what you mean by having leverage throughout the lease? Or was that captured in what Nathan was speaking about in his reply. Thanks!
The biggest problem with letting someone pay up front for a year, is that it's really hard to kick them out, if things go wrong. Depends on what your risk tolerance is, but people who usually pay up front can not get past a landlords screening process. Often poor money management.
- New to Real Estate · Bellbrook, OH · Member since 2021 · 7 posts · 2 votes4y
Hey Anthony!
I think there was an article somewhere here on BiggerPockets that explained the yellow/red flags of an upfront lump sum for rent; however, now I can't find it! Basically, as mentioned above by others, there are a lot of yellow flags for the following reasons:
-The tenant may want you off their back so they can participate in illegal activity
-The tenant may want to STR the property (not necessarily a bad thing--you can actually make more money this way by partnering with a tenant to do this--it's only bad if they are trying to do it without disclosing to you and obtaining your permission to do so)
There a couple a reasons why someone may want to pay rent upfront with good intentions:
-Perhaps they are a student who took out a loan for student housing (or their parents are footing the bill and wish to pay for the entire semester/year upfront)
-With today's housing shortage, perhaps they have had so many issues competing for houses they want to remain competitive with other applicants in this market by using this negotiation tactic
The way to protect yourself is to do exactly what you and others said: solid screening/background check and if it were me, I'd also ensure my tenants knew I'd be doing lots of (legal) checks on my property through the year. Good luck!!! - Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
Thanks @Emily Menker appreciate all of the information. I'll continue to search BP for that article. I'm sure it's out there somewhere! And yes the situation is basically the parents are helping him out in terms of money since they are moving (retiring down south) and he will be working and going to school here so he wants to stay in the neighborhood. I just want to make sure I cover all of my bases before moving forward.
Quote from @Emily Menker:
Hey Anthony!
I think there was an article somewhere here on BiggerPockets that explained the yellow/red flags of an upfront lump sum for rent; however, now I can't find it! Basically, as mentioned above by others, there are a lot of yellow flags for the following reasons:
-The tenant may want you off their back so they can participate in illegal activity
-The tenant may want to STR the property (not necessarily a bad thing--you can actually make more money this way by partnering with a tenant to do this--it's only bad if they are trying to do it without disclosing to you and obtaining your permission to do so)
There a couple a reasons why someone may want to pay rent upfront with good intentions:
-Perhaps they are a student who took out a loan for student housing (or their parents are footing the bill and wish to pay for the entire semester/year upfront)
-With today's housing shortage, perhaps they have had so many issues competing for houses they want to remain competitive with other applicants in this market by using this negotiation tactic
The way to protect yourself is to do exactly what you and others said: solid screening/background check and if it were me, I'd also ensure my tenants knew I'd be doing lots of (legal) checks on my property through the year. Good luck!!! - Real Estate Broker · Memphis, TN · Member since 2020 · 202 posts · 203 votes4y
As most have stated, this is typically (not always) a red flag. Maybe this person is new to renting and thinks they need to be the highest bid!
If they pass your credit/background check I don't see an issue, just only "spend" the money that you have accrued.
- Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes4y
@Reed Rickenbach thanks for the reply. I think that out of anything has been the most important thing I've learned in this post, making sure the rent has been realized each month before using it for future investments. Thanks!
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