Renter offering 12 months up front

61 Replies

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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.

You know the saying... If it sounds too good be true, it probably is. I'd proceed with normal tenant due diligence. Don't deviate from your normal processes. It's very rare that anything good comes from exceptions or unique situations.

Paying multiple months of rent up front was part of the renter's ploy in "Pacific Heights". I can hardly believe that was not mentioned yet since there are over 20 replies. Go watch "Pacific Heights" if you aren't yet aware of it ...

Originally posted by @Steve Babiak :

Paying multiple months of rent up front was part of the renter's ploy in "Pacific Heights". I can hardly believe that was not mentioned yet since there are over 20 replies. Go watch "Pacific Heights" if you aren't yet aware of it ...

"Pacific Heights" should be required training material for all landlords!

I have had a ton of people offering several months of rent money upfront, but none of them followed through.  Most likely BS or a scam. Did this person come from Craig's List? 

I have had existing tenants pay a few months ahead with an income tax return or student loans.

Originally posted by @Linda Weygant :

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.

Excellent point (unless  the OP plans to cook the books)!

Kudos,

Mary

A friend of mine accepted cash upfront for a whole year on the "what can go wrong" theory.  It was illegal to accept that much upfront in the state in question.  The tenant turned out to be a drug dealer,  knew he was in control and caused all sorts of issues.  How do you go to court to evict, when you, the landlord, have to admit to the judge that you violated the law and took all the rent up front?  You automatically get the book thrown at you. 

Originally posted by @Jacob Stark :

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.

 Not having read replies, I may be repeating someone.

Think money laundering! Why would someone do that besides getting a large discount? 

Paying all the rent up front often means that landlord won't be around, why would that benefit a tenant? 

Are you inclined to evict them in 3 months paying them back if you suspect the place has been turned into a brothel? The tenant won't just think of it as "quiet enjoyment" but more like "VERY" quiet, like get out of here, you have been paid!

Folks that have money to pay up front should have enough sense to know that money could be doing something else for them, you'd need to beat a money market account for it to make sense for them. You're not earning interest, they are, do you want to be their bank?

What is the benefit to them in doing that? If they are simply paying in advance, saying they just don't want to bother making monthly payments isn't a good excuse. 

You will probably have a large cash transaction report done on your deposit. How do you explain accepting rents like that when it is not customary? 

Being skeptical in this business is a good trait to have :) 
  

@Jacob Stark

A conversation with the tenant seems like a good place to start. Just ask what their reason is for offering the advance payment. In a hot market/area it isn't uncommon for a tenant to make this type of offer to make themselves stand out from the crowd. Last month I had two applicants offer to pay a full year in advance for one of my properties. It is a very competitive market with multiple applications and very low days on market. Ultimately, I didn't accept either of the applicants (just because the first to apply met all of my criteria). I wouldn't automatically assume it is a scam without hearing their explanation of why they made the offer.

@Jacob Stark  - I'll echo what some others have said, paying a year upfront is a warning for me.  So still do your normal background/criminal/reference check and find out why they want to pay a year in advance.  

I'll also add that I've done this twice now, the first time was a retired couple who lost their house to forclosure.  They were upfront with me on all the details and offered to pay the year upfront because their credit was shot.  They checked out and I was comfortable with them so I rented to them and everything went well.

The second time I did this was for a young couple who moved down to florida from up north and were wanting to start a new life here.  The wife had a full time job and the husband worked part time and was starting a business.  So they offered to pay 4 months up front.  Everything else checked out and I rented to them and everything worked out fine.

Definitely check your landlord laws as here we have to either keep it in a non-interest bearing checking account or give the tenant a percentage of the interest if it is held in an interest bearing account.  

I don't see how it benefits you much.  With a lump sum, what would you do with the money?  Probably have it sit in a bank account earning little to no interest.  You can't spend the money.  What if the tenant has to legally break the lease mid-term (some states have laws about military, etc.).  You may need to return some of the funds for future months.

You still should do background/credit check as you would with any other tenant.

The tenant can easily open a checking account and set up automatic payments to you, via bank check or electronic transfer. Why not just do that?

I had a situation where the tenant didn't qualify (based on income) for the full amount of rent.  He had very good credit, clean background, and had savings.  I wasn't worried about him paying reliably, just that his income wasn't high.  We agreed that he would pre-pay a lump sum to "buy down" the rent amount.

Here's what we did.

Monthly Rent- $1000

Security Deposit - $1000

Non refundable Pre-payment $300 X 12 to make the rent $700/month.

Due at lease signing - Sec. Deposit, First Month, and Lump Sum (1000+1000+3600).

I don't know if this example helps you-  Just a way to meet halfway.

Great discussion here and thank you all for adding your experiences and opinions.  This has been very helpful.

To followup, this renter wanted a discount on the rent by paying up front but we haven't dug further into it then that at this point.  He's a young guy that likely has parents helping with this.  It's also a competitive rental market, so we believe he's trying to get a leg up.  We have another renter that is willing to pay a higher amount monthly and they seem to fit what we need much better anyway.  Given that we're newer to RE investing, we also feel like it's important that we get solid systems/processes setup and working before we jump into a one-off situation like this.  

We've decided to go with the monthly renter for the above reasons and to avoid possible issues or legal costs to prevent/fix potential issues.  Thanks again for sharing.

I would just ask them why they want to pay up-front. It could be a personal reason and legit. However, due diligence is the protocol, no matter if tenant pays up front or month-to-month.

You can't spend that money just yet, unless it is a full 12 month lease. If you do use that money, and there is no lease, and they decide to leave before the 12 months are up, you have to give that money back. Maybe put a stipulation that they're agreeing to pay for 12 months and no refunds if they decide to leave early. Maybe put that in a lease.

Don't offer a discount unless THEY ask.

I mentioned this in with a similar question but my sister-in-law paid a year up front. She's trying to start a business and take care of my mother-in-law and I guess would not have been approved otherwise on the income front. The money comes from my MIL (retired), who was pulled out of a nursing home that was 7K a month.

Why not buy? They can't afford where SIL wants to live in a place where MIL can move around and won't be trapped. Oh and it's in Silicon Valley.

If you are interested in the renter find out what their deal is and still screen them for non-income problems. People with irregular income are not all bad, they're just not normal.

What does the potential tenant do for a living? It is not that uncommon if they travel frequently (pilots and truck drivers do this all the time) or if they are military going on short deployments.

In Dubai, rent is almost always 12 months upfront. In London, my rent was weekly. In Norway its almost always monthly. I have experienced all without it being suspicious. I would rent to a person offering 12 months upfront. And I would also offer to pay it should I rent. Its really clean to just have one transaction.

Originally posted by @Ryan Dossey :

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. 

 College students or parents subsidizing a recent graduate would make a lot of sense for this arrangement.  

A college student is a lot lower risk to overstay a pre-paid lease, although I would have the parents on the lease just in case.

We've gotten this kind of thing from time to time. Sometimes it's bogus, sometimes it's legit. Just make sure they check out in everything else (don't relax your criteria because they are offering a lot up front, if they have evictions, you should still deny them) and a reasonable explanation as to where they got the money. 

Great stuff on here.

It does all come down to tenant and law.

I have seen it done in Michigan. I had a client last year who was divorced and drove a beautiful Porsche 911 Turbo and paid $26,000 up front to the landlord for the year on beautiful lake here in Oakland County. She then bought a home this year.

Each situation is different. Do your diligence!

I had a tenant pay 12 months up front once. It was a retired couple and they handed me a check for 15.5k. Worked out great. They were perfect tenants for the 13 months they stayed in the property.