Tenant wants to pay full years rent

42 Replies

Hey all I was wondering if any of you have had this happen before. It seems kind of sketchy for the tenant to want to pay full years rent. What should I look out for, how can I protect myself for anything bad that can happen? Any and all advice will be appreciated!

He may be a consultant that just wants a storage space.  I wouldn't consider this a bad situation.  Talk to a CPA about revenue recognition and you should be good to go.

If you take a full years rent, then imagine how tough it will be to evict when they bring in 20 people in like a turnstile and start slanging out of your unit.

The easiest reason a court will allow eviction is “non-payment”.

If they have made all payments for a year up front, that will be tough to boot em. Something else is up.

I passed on a similar tenant app from a realtor who wanted to pay 6 months up front, claimed to just have bad credit but I was not impressed with the sob story.

Advanced payment is always a red flag.  Follow your normal due diligence and make sure they qualify.  Check with their previous landlord, etc.  I have had some 1099 people willing to do this for a good reason but others were trying to hide something.

I don't think it is sketchy.  If you are going to rent them and they want to give all money in advance TAKE IT!   You don't have to worry every month if they are going to pay.   Just remember prepaid rent should be treated like escrow or deposit funds.   You should put it in a separate account and pay the rent from hat account to yourself each month as it comes due.   It is really still the tenants money until the time the rent is due.   If the house burned down you would have to refund the balance.  You would just want to make sure you have the money if this happens.   That is why you take it up front and pay yourself each month when the rent is due.  No waiting around for money or trying to track down late payments.  

I had someone ask because they just got a huge commission check, and they knew that they weren't good at saving money, so they wanted to have that money out and paid.  They were fine and all was well.

Do the same credit and background checks as normal.  

I understand they are offering it but in some states, it is against the law to make them pay more than a certain amount upfront.  So if you do go with them, have them sign a letter or stating it is their choice.

Also, what is their career?  Is it a career that can potentially give a large commission check. i.e. sales.

From a tax perspective - The full year's rent will be taxable at the time that it is received and not necessarily when it is "earned".

Ex. lease of 10/1/2017 - 9/30/2018 lease with a full year of rent received on 10/1/2017 will be 100% taxable in 2017 and not 3/12 in 2017 and 9/12 in 2018.

Depends on the situation. We have had college students and/or their parents pay ahead based on their aid situation or out of town parents. We held it in a separate account and paid it to ourselves as it came due. Just a regular renter with no logical reason for the request? I would be wary.

I had a friend moving to the Bay area that just paid a full year's rent up front, he has great credit, going to work with Tesla, no evictions, but didn't meet the income requirement. This was his only path to securing a house. Like Jd Martin said, depends on the situation.

Assuming the tenants qualify to rent from me in the first place, I'll take advance rent any day of the week. What harm could there be?  I have a very strong lease for my tenants. Paying advance rent does not give the tenant any additional rights under a lease, other than you can't boot them for non-payment of rent. All the other terms of the lease are still in effect. If I want to boot a tenant for opening a meth lab in my unit, then I can do so under my lease. Whether or not they paid rent in advance is irrelevant.    

Circumstances arise that they may pay large amounts in advance. I have never had more than Bree months in advance. I would give them a discount on the last months rent. Make sure your lease will not allow them to sub let. Be sure to get all occupants on the lease. And tenants will be responsible for cost associated with evictions if they don't comply with terms of the lease. That way you can deduct it from that lump sum payment.

Originally posted by @Rich N. :

I understand they are offering it but in some states, it is against the law to make them pay more than a certain amount upfront.  So if you do go with them, have them sign a letter or stating it is their choice.

Also, what is their career?  Is it a career that can potentially give a large commission check. i.e. sales.

 I was about to post that I think it's illegal to collect that much upfront in Massachusetts. Sure, it's a notoriously tenant-friendly state, and I doubt many other states are like that, but the OP definitely needs to check the local laws just in case.

New to the ideas here. What I hear is, 

First make sure it is even legal to take that much upfront, 

Second, If it is legal hold the payment "in escrow" and make monthly payments from that. (would that avoid the Tax issue @Basit Siddiqi spoke of?)

Third, Have a strong Lease! (always a good idea)

Last thought, you still want to watch the property/tenant. As noted in this thread, many people may have good reasons for offering to pay upfront rent. However if the reason is to keep you (owner/landlord) out of there hair? My gut feeling would be to pass on them.

The Cash money upfront can blind you to other things (in my opinion) . Due diligence is always good moving forward . Do the necessary background check and be safe. 

I've done rentals for 35+ years and have on several occasions offered a full years rent up front. On most of them, I declined because if you have an NOO mortgage, there is a clause that restricts me from collecting more than 3 months rent up front.

I did accept it in one case, sorta, a group of nuns from a religious order wanted the apartment. I vetted them and they explained all their expenses, food, clothes, rent is paid by the payable department of the religious order, but they cannot guaranty the payable department will process it on time and get the rent to us on the first, each and every month.

What I suggested is to have their payable department issue 12 post dated checks which they agreed. When they got the post dated checks though, they suggested we hold on to it, and remember to bring it to the bank every month, as their payable office normally handle such things, and they rather have us remember it's the 1st of the month every month, instead of them.

Follow the logic?

Now I understand the nun's issue when after getting the post dated checks, we misplaced a bunch at one time during the year, and deposited a check dated Sept 1 on Aug 1. When it was all said and done, we figured it was easier if we deposited one check in the beginning.

There are other cases where I got such requests, though unusual, but not a red flag in all cases.

I had a tenant sign a 1 year lease on august 1st and she paid the full year plus security deposit up front($24k). She is retired and had a hard time proving income. After doing a background and credit check (800 credit score and very little debt) I decided to rent to her. I also contacted her previous landlord and everything checked out good and the reason she was moving was because her previous landlord was selling the house. I had my doubts and actually posted a similar topic as yours a few months back. It has only been a few months and everything is perfect. In the end it just comes down to every other potential tenant and you just need to go with your gut feeling. 

Originally posted by @Frank Chin :

I've done rentals for 35+ years and have on several occasions offered a full years rent up front. On most of them, I declined because if you have an NOO mortgage, there is a clause that restricts me from collecting more than 3 months rent up front.

I did accept it in one case, sorta, a group of nuns from a religious order wanted the apartment. I vetted them and they explained all their expenses, food, clothes, rent is paid by the payable department of the religious order, but they cannot guaranty the payable department will process it on time and get the rent to us on the first, each and every month.

What I suggested is to have their payable department issue 12 post dated checks which they agreed. When they got the post dated checks though, they suggested we hold on to it, and remember to bring it to the bank every month, as their payable office normally handle such things, and they rather have us remember it's the 1st of the month every month, instead of them.

Follow the logic?

Now I understand the nun's issue when after getting the post dated checks, we misplaced a bunch at one time during the year, and deposited a check dated Sept 1 on Aug 1. When it was all said and done, we figured it was easier if we deposited one check in the beginning.

There are other cases where I got such requests, though unusual, but not a red flag in all cases.

I thought post dated check were illegal or is that just my lovely state of MA again ?

l myself offered to pay every quarterly with a month to month lease as I did not want to go deposit rent into landlord account.

Ask for motivation and look at his credit history. It could be a drug operation not wanting you to be near. Put clause you will have quarterly audit.

Originally posted by @Rich N. :
Originally posted by @Frank Chin:

I've done rentals for 35+ years and have on several occasions offered a full years rent up front. On most of them, I declined because if you have an NOO mortgage, there is a clause that restricts me from collecting more than 3 months rent up front.

I did accept it in one case, sorta, a group of nuns from a religious order wanted the apartment. I vetted them and they explained all their expenses, food, clothes, rent is paid by the payable department of the religious order, but they cannot guaranty the payable department will process it on time and get the rent to us on the first, each and every month.

What I suggested is to have their payable department issue 12 post dated checks which they agreed. When they got the post dated checks though, they suggested we hold on to it, and remember to bring it to the bank every month, as their payable office normally handle such things, and they rather have us remember it's the 1st of the month every month, instead of them.

Follow the logic?

Now I understand the nun's issue when after getting the post dated checks, we misplaced a bunch at one time during the year, and deposited a check dated Sept 1 on Aug 1. When it was all said and done, we figured it was easier if we deposited one check in the beginning.

There are other cases where I got such requests, though unusual, but not a red flag in all cases.

I thought post dated check were illegal or is that just my lovely state of MA again ?

Glad you asked.

When we made the mistake, deposited the Sept 1 check on August 1st, called our banker, and she said it's no problem. What it means is the date is irrelevant, it could be dated a year ahead, and I am  still legally allowed to deposit it. Since I still had a bunch of posted dated checks from the tenant, I recall for another six months, she said I can deposit it all and I'm OK. And the tenant is not in violation of any law either. All it means is a check written to me and signed is good on the date it's given to me, regardless of date of check, and I can legally deposit it.

At least, that's the law in NY as explained to me.

The way the nuns explain it to me, if I really want to get checks monthly, and if I believe post dated checks are illegal, then I'm welcome to call and follow up their account payable department monthly, and dun them for payment, and then late fees. They admitted their AP department is not always on the ball. They explain as members of the order, they turn all their income in and the order pays the bills, so all that happens is if I call the tenant for rent, they'll have to call the AP department, so late payments and late fees are not their headache but mine.

Of course, if I complain about late rent payments, they would tell me it's all my fault as they offered me an easy way.

I had a good W2 job at the time, work long hours, doing REI on the side, and I am not forward to following up any AP department for payment every month.

What is the reason they want to pay a full years rent at once?  It could be for their own peace of mind, or maybe they're drug smugglers....you have to know the reason they're wanting to pay up front.  Also, combine that with the normal due diligence(specifically, their rental history) and you should be able to make an informed decision.  Could be more difficult to kick them out if that need rises as well, however, this can depend on the specific tenant laws in your state.

Hope this helps!

Pre payment is generally a strong indication of a individual with extremely poor money management skills.

It can also be used by professional tenants to take advantage of hobby landlords. Once the tenant is in the unit they have the legal right to demand the full return of THEIR money.

I generally consider the offer to be a form of bribe. It can be seen as being used to distract a landlord from doing full due diligence on a applicant. I simply inform them that our industry operates on standard monthly payments. For me it is a red flag and if the tenant feels they can not make regular monthly payments on time then they are probably not qualified.  

I have no interest in babysitting a tenants money or managing it for them on their behalf, I prefer financially responsible tenants.

@Christof Gardet  

I am with @Frank Chin on this one. 

Tenants can have many reasons to want to pre-pay rent in years advance, most of which are not sketchy at all. My family has a SFH in Boulder which they manage from Santa Cruz. The tenant opted to post-date the rents checks to avoid any potential hiccup in getting the rent in on time via trans-state snail mail (my parents are old school). This gives both the landlord and tenants ease of mind...assuming, of course, you don't lose the checks.

Thank you everyone with your advice. The updated information is that I misunderstood what they meant by full year, they meant until the end of the year. Like October, November, December.... Totally cool with it now, also not at all sketchy!!!

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