Best use with a year of rent upfront?

Question

Hi BP Community,

I'd like to survey the forums on the best use of a year's worth of rent paid by a great tenant upfront on a personal residence that is just in the 1st year of a 30 year conventional.  Leave it in the bank account to auto-pay the mortgage each month, or put it towards the principal but still pay the monthly out-of-pocket as if nothing changed?  Plan to keep the house for at least 5-10 years.

Thomas S. · Answer

Tenants wanting to pay up front usually means a problem of some sort. I never accept rent in advance.

Having said that and assuming you have agreed to accept the payment you need to understand the money is not yours until each monthly rent payment is deducted from the total amount. Never spend it or place it into your receivables account.

You must keep the money in a separate account and only draw it out as the tenant owes rent. Legally It is not your money until the first of each month.

In the event the tenant decides to move before the end of the lease you are obligated to refund the advance.

In the future I would strongly advise against taking advance payments. Our business operates on the principal of monthly payments and this is best adhered to for the sake of all involved.

Frank Squire · Answer

I would not take a year upfront because if for any reason you want to be able to evict the tenant it can cause issues.  Also all future rent should be placed in escrow and only dispersed when due.  If for any reason the tenant takes you to court and the judge finds out that you have used rent money  that the tenant was not obligated to pay yet you can be in very big trouble.

Jason Hsun · Answer

Thanks to all of you for your replies.  Definitely all issues to consider on my next property or on the lease renewal.  On this one, did a full background check of the tenant beforehand with the property manager, as well as called on previous landlord references.  Came out all clean.  As a relatively new & unique higher end property, I assumed the tenant wanted to make sure their offer would be better than other competing bids in order to secure the property.  Nevertheless, will consider the overwhelming response against doing it again...

Nathan Miller · Answer

I'm with @Roy N. and everybody else on this one.  As nice as it might be to get a year of rent up-front, now they have paid and you have accepted them for the next 12 months.  This means no option of eviction if something goes terribly wrong within that time frame.  Or at least a very difficult eviction.

There's also the possibility that the money is not legit and they just need to not have the money in their possession right now.

If you are considering accepting it, you might want to write up an agreement that states that this is considered a security deposit payment so it's not considered prepaid rent.  Check with your local laws though.

Save yourself the trouble and keep this one month-to-month I'd say.

Michaela G. · Answer

What would you do, if you were suddenly get a letter from the police, advising you that they've made some undercover buys at that house and if they were able to do another buy in the future, they would seize your house.

Evicting him would be much more complicated now

Michaela G. · Answer

Are you sure that that is legal in your state? In some states, California for one, you are not allowed to accept more than 2 months deposit. And deposit is anything beyond the immediate months rent, regardless of you calling it 'last month' or whatever

Roy N. · Answer

@Jason H.

Usually when a tenant offers to pay that far in advance, alarm bells go off in my mind: what is the source of the money; did I effectively screen this tenant; are they about to loose/quit their job, etc.

Anyone who is good at managing their money is not going to prepay rent that far in advance.   You should also check local laws to ensure you are permitted to accept such a prepayment (here we are not) and whether you need to track and pay interest on the prepayment portion.

All those wet-blanket warnings aside, we have had the situation arise with international students whose parents wanted to pre-pay the rent for the year so they only had to convert currency once.   Since we could not accept a full year's worth of rent {and really did not want the burden of administering it}, we had them put it in an escrow account with automatic withdrawals each month for their kids' rent.

Best use with a year of rent upfront?

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