Applicant offers to pre-pay a year's rent in cash

25 Replies

I just had a prospective tenant tell me that he would want to pre-pay the yearly rental fee in cash upfront because "that is just the way he does business."  My gut tells me that this is a red flag.  I would still screen this applicant.  Is it ok to accept the yearly rent upfront in cash? What are the potential pitfalls?

It would be difficult to evict someone...for drugs, dogs, noise, filth if they have already paid for the entire year. There are probably other reasons.

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@Astrid Dymond I have often had tenants pay rent in advance and just accepted 7 months advance payment on a $2500/mo rental.   I like having the money in my bank, not just confirming they have it in theirs! Just be sure not to spend it until the rent is “due”. That way if you do end up terminating early you can refund unused rent.  

There are many reasons it can be appropriate.  Folks just moved to the area and need time to get new jobs, but have excellent history.  Divorcee using settlement $ to pay in advance to clear obligations while they reorganize life.  Don’t have great credit so want to assure you they’ll cover the rent.  Etc... 

Screen, screen, screen! Use a professional service. Contact last 2-3 landlords (5-7 years history), contact employer to confirm likelihood of job continuity.  

In some cases, prepaid rent is used at the end of the lease instead of the front end (maybe they pay 4 months but it is applied to months 9-12) 

Of course they may be a problem hoping you’ll leave them alone once you have the money so they can go about their devious business.  So stay connected to them, do periodic inspections, and address any issues right away so they know you are not an absentee landlord.  During my move in orientation I let them know that we will do a follow up in 30 days and then do quarterly inspections to “appropriately maintain the property”. 

Good luck to You!

Honestly, when I was a renter I once offered to pay rent up front for a year.  I wasn't hiding anything, which of course would have shown in my credit check, which this person didn't even do. lol. I didn't want the hassle of writing checks, getting stamps, etc, etc.

I wish I could give you the link to Mindy Jensen's blog about do's and don'ts as a landlord. Accepting rent a year in advance is one major DON'T. Yes sometimes there is no devious intent behind it but you as a landlord must follow your gut all the time. To piggyback off of Marian's statement, eviction is easier if there is proof of non-payment. However, try to evict a tenant because of uncleanliness, noise or drugs is an uphill battle. You want that leverage when you go to court. You take away that leverage and give power to the tenant because rent is already paid. Why not do a month to month for about a year and if the tenant seems responsible, take the year advance rent when its time to renew the lease.

How about putting the rent in an escrow account and draw the rent each month on the due date? That way, rent is not actually paid ahead, but guaranteed for the year, and if something happens and you have to evict, you don't have to pay rent back.
(267) 520-0454

"that is just the way he does business."

That's BS. Tell him that is simply not the way you do business.

Let him adapt. If he wants the apartment he will comply, if he is attempting to bribe you into not doing a thorough screening he will go away. If you want to trip him up suggest to him that he set up a separate checking account himself to put the money into and issue you 12 post dated checks on the account. It works out the same for him but he gains no leverage over his landlord as it is no longer a cash flash bribe for the landlord.

If you accept the advance payment it must be placed in a separate tenants account and only drawn on monthly to pay the rent. The money remains the property of the tenant for the duration and legally he has the right to ask for any remaining amount back at any time during his tenancy. It is not the landlords money.

Screen him and you will find out his motivation.

Astrid,

Here is a copy of a blog I wrote on this subject, hope it helps:

I know it may sound appetizing and those dollar signs can look oh so great, but there are many downsides to collecting all the rent upfront. You also will need to check with your state and or municipality, it could be against the law to collect money beyond the current rental period.

Some of the issues that I have ran into in the past are that the tenant needed to break the lease, we re-rented the property, but the owner wanted to keep all of the rent in escrow. We had no vacancy, no repairs, and the tenant paid our lease fee. There was no out of pocket or loss to the owner, so litigation ensued, eventually (one year later) the owner lost and had to refund the money we had in escrow. Thank god we had the funds in escrow and refused to send them anywhere until litigation ended, or I think the tenants would have been out the money, long spent by the owner.

Some other issues to consider that could and have happened to owners, is that the property could be damaged by a hurricane, flood etc… and they have spent all of the money, which essentially needed to be refunded to the tenant.

The tenant could file bankruptcy, and the owner could be dragged into this because of the upfront rent the tenant paid.

What if the owners get divorced, what happens to the money that was already paid? What if the tenant is in violation of the lease and you need to evict, you may have a real issue when it comes time to evict.

Keep it clean and don’t let that carrot/hook cloud your vision when it comes to collecting all the rent up front.

Kim Meredith Hampton, Real Estate Agent in FL (#BK0601196)
407-253-9324

@Astrid Dymond ,

Your gut is telling you it's a red flag, because it is!!!!    

 People give you the money, so you have no reason to contact them, see the property, which tells me they'll likely do questionable activities in the home.   We had one person ask "are you an active landlord,  like do you come around and do checks often?" .....    By paying upfront, you can't easily evict them for whatever reasons... chance are, they have a bad record and use the $$$ upfront as an incentive to have a landlord rent to them.

If they want to see the money aside, suggest it be in a different savings account, and draw from it each month, so it's the same concept.   I'd be VERY hesitant about renting to someone like this, they are showing you upfront they don't know how to budget and plan.

I would ask the applicant why because it is not usual and customary and I will be open minded but "that's the way he does business" is not acceptable.

I did have a similar offer once, it was made by an applicant who is a foreign student just starting college.  No credit no history.  Her mom came with her to help her start college then would be leaving to go back to Singapore.  Her mom wants to cosign lease and pay one year in advance because she doesn't want her daughter to have to worry about paying rent on time.  She wants me to take over ALL her bills - electric, cable TV, internet, even cell phone, and charge her a lump sum all inclusive and she wants me to check in on her daughter from time to time, take care of her if she is sick, call her if I see her daughter hangs out with "bad people"...I said she wanted to rent a space, a butler and an informant?

Thank you everyone for your very helpful input. This applicant says he is "retired" and presents himself as being well off (driving an Escalade and a Hummer). The house is nice, but in working class neighborhood, his cars alone would be an usual sight there. I do not accept cash thus far from any of my tenants, much less upfront for the year.  I appreciate the input on handicapping myself should I have to evict and losing control of the house.  My impression is that the source of funds is perhaps not taxed, to put it mildly. I am going to go with my gut and find a more suitable tenant..

Depends on the area and type of property you’re renting. Is this a C/D or an A/B? I rented for a year up front once to a young tenant. He had just been hired by a tech company and got a $30k signing bonus. Paid 12 months up front, then paid monthly on time for another 18 months. But he disclosed the source and employment checked out. Doesn’t seem like that’s your scenario.

Originally posted by @Marian Smith :

It would be difficult to evict someone...for drugs, dogs, noise, filth if they have already paid for the entire year. There are probably other reasons.

It would be difficult to evict for lack of payment, but evicting for drugs, dogs, noise or filth would not be payment related. Of course if you evict someone, you need to return their pre-paid rent. It is a misconception that prepaying rent prevents someone from being evicted.

Sounds like his income is from illegal sources, don't let well off and retired fool you.

Good call anyway to pass.

Originally posted by @Kim Meredith Hampton :

Astrid,

Here is a copy of a blog I wrote on this subject, hope it helps:

I know it may sound appetizing and those dollar signs can look oh so great, but there are many downsides to collecting all the rent upfront. You also will need to check with your state and or municipality, it could be against the law to collect money beyond the current rental period.

Some of the issues that I have ran into in the past are that the tenant needed to break the lease, we re-rented the property, but the owner wanted to keep all of the rent in escrow. We had no vacancy, no repairs, and the tenant paid our lease fee. There was no out of pocket or loss to the owner, so litigation ensued, eventually (one year later) the owner lost and had to refund the money we had in escrow. Thank god we had the funds in escrow and refused to send them anywhere until litigation ended, or I think the tenants would have been out the money, long spent by the owner.

Some other issues to consider that could and have happened to owners, is that the property could be damaged by a hurricane, flood etc… and they have spent all of the money, which essentially needed to be refunded to the tenant.

The tenant could file bankruptcy, and the owner could be dragged into this because of the upfront rent the tenant paid.

What if the owners get divorced, what happens to the money that was already paid? What if the tenant is in violation of the lease and you need to evict, you may have a real issue when it comes time to evict.

Keep it clean and don’t let that carrot/hook cloud your vision when it comes to collecting all the rent up front.

Landlords should never spend money they collect in pre-paid rent. It should be held in an account and if for any reason the tenant leaves the property, remaining prepaid rent needs to be refunded. If the tenant violates lease terms and you pursue eviction, prepaid rent should have no bearing on this, beyond the fact that you must return any prepaid rents. In other words, you can't evict someone and keep their money for the rest of the lease term.

In my opinion prepaid rent is more risky for the tenant, which is the point I got from your blog post too. As long as you verify the income came from legal sources, accepting rent prepaid should not be a problem. (Check local laws too.)

Great question. I would do some qualifying questions to see what kind of potential tenant you're dealing with. Get them talking and listen well. Screen screen. I've taken 2 months rent before, but tenant was already in place, and have a good record of paying on time.

It's not a red flag by itself.  If the application process yields a good renter, he may just have money and not want to hassle with paying every month.  Just approve or deny them based on your normal process.  If they pass, go for it.

Now, what I would do is account for that money as an "asset" and each month move the month's rent from the asset column to income on the P&L.  That way you won't see it as money you can spend.  That way, if you have to evict, you can return any money that hasn't gone towards rent yet.

If you are taking all that money as income in one month and plan on using it to finance future properties, etc (in other words, you "spend" it), then you are running a risk of not having it if you have to evict in month 3.

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My Dad let a tenant do that about 30 years ago.  The tenant drove two brand new Mercedes' and paid 2 years of rent with $100 bills.  I think he lasted about 9 months before he was arrested for being a bookie.  Fortunately, he was a "nice guy" and wrote a apologetic letter announcing that he was vacating the property for legal reasons and was not going to seek a refund.

Do not ever take the chance that you will be so lucky...

My brother manages a tenant who pays 1 year at a time and they are absolutely fine. The husband had just lost his mother when they moved in. They had cash, and were really not up to dealing with anything at all emotionally. As far as I know they have continued to pay a year at a time for quite a while now, and are absolute gems. They take amazing care of the house and their animals (it's a rural property), they pet-sit when my brother is out of town, and are all-around A+++ tenants. They just happen to be very, very private people, and like being left alone. One benefit for them is that there's no way a landlord raises the rent on tenants like that without thinking about it long hard ahead of time - if they decide to move the landlord KNOWS they have the resources to do so in a heartbeat!

All that said, screen EVERYONE (especially paying attention to SS#/address mismatches, since those can signal identity theft). Someone like the Hummer guy I'd check out on social media too--he does sound rather illegal-income-ish. 

@Astrid Dymond I have accepted 11 months rent upfront before. The tenant stated that he didn’t like having payments or debts and he asked if he paid the 11 months up front if he could get a discount (this is something that is cultural for some people). So I accepted the deal. I also lived in the casita (Guest house in Arizona) in the backyard so I was able to keep an eye on the property almost every day. The whole situation worked out great for both of us except I found out that they had broken our vacuum after I had refunded their deposit. My wife was upset about that.

Like others have said, it's a "red flag" but not necessarily a disqualifier. I've offered to pay 6-12 months in advance before just to simplify my life (though I was usually turned down). I used to travel 30+ weeks/year, and when I had landlords who didn't have a way for me to easily pay online, it was a lot more convenient for me to write one check than worry about remembering to pay by the 1st of the month when I probably wasn't going to be around, much less have a stamp on me.

Screen the applicant in depth, but if my prior landlords had taken a pass on me just because of the offer, they would have skipped what most of them called their ideal tenant. You don't put a lot of wear and tear on a rental when you're basically never there.

I would probably turn down their offer to pre-pay even if they had a good reason - but just because they offered doesn't mean they're a drug dealer.

I have accepted a years pre-paid rent several times for commercial property tenants. Im not sure if it benefited them from a tax perspective or not and they always asked for a discount of between 3-5%. Reading this post will make me rethink that position in the future but so far I've never had any problems with it. 

The Arizona Landlord Tenant laws are written such that a Tenant can offer to pre-pay rent but also has the right to request the pre-paid rent be returned to them upon request. Yes, you could move a tenant in under the context of pre-paid rent and then the tenant could request a refund of the pre-paid rent and you would be lawfully required to refund the pre-paid rent. This is not predicated on the property condition changing etc, the tenant can request for any reason, hence it is not a practice I recommend or conduct in Arizona. #RiskReductionforLandlords

Don't deviate from normal screening, it will bite you!!!

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