Renter offering 12 months up front

61 Replies

We just started marketing a rental in the Dallas area and one potential renter has offered us 12 months rent up front.  We're thinking this is a no-brainer to take (assuming renter passes credit/background checks) but just curious if anyone has any experience with this or gotchas that I can't think of.  If you've done this before, did you offer a discount based on up front cash and if so, how much of a discount?  Our margins are slim on this one, but would be great to get 12 months all up front.  Thanks all.

Make sure you still do your due diligence on them.  Generally good tenants can find a place to rent without paying for it upfront.

One possibility is it is one of the phony cashier check scams.

There also are reasons you may want a tenant out other than failure to pay rent.  If they have paid rent, an eviction can be very difficult during the period where they are prepaid.

One option might be to do a prepaid short-term lease, e.g. 3 months.  If that works out maybe offer them another one.  If it is a windfall paying for this lease, what happens in month 13?

So the question I ask is why would he offer that?  There has to be a reason?  What reason would providing a full year of rent of front hope to overcome?  That seems really suspect to me.  If they has that kind of cash, why not buy?  not sure this is a good deal for you.

@Jacob Stark , it does seem like a no-brainer on the surface. But for reasons mentioned above, I would go out of my way to perform all the background checks you could possibly do. Call past landlords, run a criminal history, check out eviction records. 

A prepaid 12 month lease binds you to them for 12 whole months. I like the 3-months at a time suggestion, if you do decide to rent to them. Keep us posted!

Why are they offering to do this?

I can't think of any reason it would be an advantage for you.

Would it be harder to evict them next month if they violate the lease for something other than nonpayment?

Are they from Nigeria?

love the money, but NO way !  I've only heard this a few times from 3-12 months and its never worked out.  Like others have said, a good tenant doesn't have to do this. 

Once you agree, you are locked in for the year unless you have a serious violation of the lease. 

Also, in lovely Massachusetts, its illegal to collect anything more than first, last and sec dep.

Hi Jacob,

I've seen this twice in my short career as a landlord- first one was a college kid whose parents paid his rent for the year up front at a discount, we inherited the tenant when we purchased the house so we got a nice chunk of money at closing.  Second time was just recently, I had a 3 bedroom for rent and had a guy offer to pay for the year up front (at a discount of course) claiming it was great for both of us- he didn't have to remember to send the rent every month and I didn't have to worry about collecting it.  He had been a no show at his appointment to see the place, and later claimed he was there and the current tenants showed him the place.  I rejected his offer- which I am not sure is even legal in Michigan- and never heard from him again.

My feeling is that they are looking for a discount or have a sum of money and can't trust themselves not to spend it on something else.  it is pretty easy these days to set up an automatic payment from a checking account, so I don't buy the "so I don't have to remember" excuse.

If you choose to do this, make sure it is legal- in Michigan we can't collect more than 1.5x the rent for a security deposit plus the first month's rent.  You might be able to play with the lease wording to call the term of the tenancy one year (instead of one month) but I am not willing to risk it.  You might have to hold the advance rent in an escrow account and draw from it monthly so then what is the point?

Kelly

I have a tenant who pre-paid for six months, and it's worked out OK so far.  He was using student loans to pay the rent (as they were often late with it before).  This is the last month that was paid, so I'm very curious to see if they will continue to pre-pay since it's the start of a new semester, or if they will be late again (or have to be evicted). 

The only time I would consider this would be if it was a college student. Paying their bills with loans. That would make sense to me. They would rather give you the money vs worry about not spending it. 

I don't see a problem with this. Some people have jobs that don't have bi-weekly paychecks. So it's hard for them to prove consistent income that most landlords require. Actors in Hollywood would be a prominent example. Doesn't mean that they are broke - in fact it shows that they're responsible with the money. They just get their income in large chunks.

Really great feedback everyone, thank you.  The renters seem legit but I completely agree that full checks need to be completed.  I hadn't thought of that legal angle of if we can accept that, so I'm glad I asked the question as we don't want little things like that to trip us up.  I'll be sure to post back and let you know what we find and decide.  Thanks again.

@Jacob Stark

I have seen this before and it was exactly a situation as @Greg Rusianoff described. The tenants had fluctuating income, sometimes very high, traveled a lot, and simply wanted to pay up front and negotiate the best price. Everyone won in that deal. Landlord was happy to get nice chunk of cash up front and tenant did not have to think about "rent" for a year.

There was still a lease with all the normal rental conditions, etc. I love those types of deals...

- Jill

Really depends on the situation. Usually this question has been asked by tenants that want a rent discount for paying in advance. Also had people who just got divorced and had a lump sum but didn't have steady employment yet. Also had some really sketchy people ask this. Investigate and find out why. If it doesn't make a lot of sense then pass.

@Rob Beland , thanks for asking for clarification.

I meant to compare the 12-month lease with the 3-month lease proposed above. I don't know how that got mistyped. In a 12-month lease rather than the suggested 3 month lease, you are stuck with the tenant for the entire year, if you don't like him, even if he doesn't violate the terms of the lease. 

Here we are not permitted to solicit nor accept rent in advance of the next rental period.  On the rate occasion when we have a tenant who wants to pay in advance we send them to the bank to deposit their funds {in a trust account} and set-up and automatic payment of rent each month.

Someone is offering you money?! Take it! Haha. I would definitely take it. I have a tenant that pays three months at a time due to student loans. It's great cause I don't have to worry about them paying/being late for three months at a time and I know that they aren't going to bail on the property any time soon. Only thing I would suggest to keep in mind is to be careful when spending the upfront rent. It's tempting to reinvest it elsewhere or pay down some debt with it, but remember you have to pay a year of expenses with that money!

My concern would be whether accepting the full year rent would mean that the rental period for your lease would be interpreted as being a year by the local court. It may be worth checking with a local lawyer. It doesn't always matter what the lease says but how a local judge will interpret it. In Michigan, if I choose to terminate a lease I must give, at least, a full rental period notice to the tenant. That is usually 30 days. If the rental period were interpreted as a year that would mean I would have to provide a year notice if I wished to terminate the lease. Would that apply in your County? Would you be willing to do that?

Originally posted by @Jacob Stark :

Really great feedback everyone, thank you.  The renters seem legit but I completely agree that full checks need to be completed.  I hadn't thought of that legal angle of if we can accept that, so I'm glad I asked the question as we don't want little things like that to trip us up.  I'll be sure to post back and let you know what we find and decide.  Thanks again.

When you say the renters "seem legit"  what does that mean?  Did the renters come and look at the unit?  Did all adults fill out an application?  What kind of jobs, what kind of credit, what kind of income, what kind of references? You should have a sense of what's going on before any credit or criminal checks.  IMO you don't need to waste anytime dealing with tenant applicants who have not seen the unit or not filled out applications and provided supporting documentation.  

Typically when I am offered this, it's because the tenant knows his credit is terrible (foreclosure of BK on his record) or has an unreliable source of income (actor). They are typically pretty upfront why though.

I've got a tenant (now a widow, since moving in) that paid six months of rent up front plus sec deposit at signing. Her and her husband had jobs that were highly seasonal. They were (and she still is a) model tenant(s). They were just more comfortable with paying up front, and I was certainly comfortable earning interest on their rent money. I left the rent money alone in the account for that property, and it sat there until the next batch of rent was collected.

I was in housing court today because of a tenant who payed the entire 1 yr lease + security in advance. 

Shortly after the tenants moved in they started on a power trip and felt that they were in total control of the situation. Ultimately it lead to an brutal eviction. My attorney claimed taking the one time payment was illegal and constantly lit me up because of it. 

With all of the electronic banking options these days there is no benefit in taking a lump sum payment.

One thing to keep in mind from a tax standpoint is that as passive income, you will be taxed on the income all at once, so if you've been looking to write off passive losses against other income, you may have taxable income in the year you accept the money and then a much larger loss than usual in the next year, assuming your rental period straddles tax years. 

Both situations can work against you so be aware of it and understand your overall tax situation and whether or not this will work for you.