Tenants Who Pay a Full Year Upfront

36 Replies

Are bad news, according to nearly every experienced landlord I've seen chime in on these types of threads. 

However, it seems that many newbie investors (some with even less than my three years experience) like to chime in and talk about how great a deal landlords get when the tenants pay in full upfront. These types of replies got a lot of "votes" in a recent forum thread, implying that the community agrees with that sentiment, while more reserved opinions regarding the matter of accepting large amounts of rent upfront in order to overlook certain applicant weaknesses got much less love.

So, this thread is for experienced landlords. Can anyone relate personal stories, or anecdotes based on REAL EXPERIENCE, regarding tenants that are at least one full year old, regarding accepting rent upfront? 

I'd like to hear them. 

And, it's perfectly fair to say, "I had a tenant pay in full upfront because of X, Y, and Z. That tenant never gave me a problem, and I enjoyed the rent in full upfront, and they still live there problem free today several (more than 1) years later)." That would prove me wrong and the other enthusastic newbies right - that this is a perfectly reasonable way of doing business, with excellent outcomes for all involved.

But I bet not.

This discussion is triggered by another thread, " Would You Rent To This Applicant". A couple of investors with little more experience than myself seem to dismiss the caution of experienced investors that had some wisdom to share and "vote" for replies posted by newer investors that may not have had a full run with accepting a year of rent upfront.

My opinion: I listen to my elders on this one and would refuse basically any instance where a tenant offered to pay a full year upfront. My criteria for income, credit, and criminal background are quite reasonable for the area I operate in, and I am not willing to bend them. Any time a tenant offers to pay a year upfront is a huge red flag, even if they otherwise meet my criteria

Another thing to consider, depending on the state, it might be illegal to accept more than 2 or so months of upfront rent. 

Each state has their own tenant-landlord laws in regards to deposit - and, yes, anything other than the current rent, would fall under the term 'deposit'. 

I have an experience with this.  My step mom is an immigrant and when she came here and married my Dad they never thought of building her credit.  So when he passed away years later she had literally no credit and wanted to live closer to work, her income did not qualify either but her cash on hand was plenty.  So to convince landlords to take her we offered to pay for the year in advance and I showed them my credit report and offered to cosign.

That was 5 years ago, she still live in the building (condo) but with a different landlord.  Never missed rent   

And Florida  there is no benefit to accepting a year's rent in advance. It must be held and cannot be drawn on until due. If the tenant breaks the lease  and leaves and then the property is immediately rented  that additional rent must be returned to the person that deposited it.

I was seasoned long before being offered rent up front and was fully aware of the risks. My screening is very simple, if a applicant can not qualify on their own merit then I reject them. I do not have any motivation to accept a bribe when there are other applicants that easily qualify.

In my jurisdiction we have had a growing number of professional tenants due to our tenant friendly regulations. What they do is offer a year in rent up front hoping a hobby landlord will bite, usually on a SFH. As soon as they move in they demand the return of their upfront rent payment and legally it must be returned. Once the landlord returns the money they do not ever see another dime in rent payment.

As professional tenants they can often stall a eviction for 6 months to a year and generally trash the property before they move on to their next target landlord.

If a tenant does not qualify based on your screening policies offering rent in advance should have no bering on your decision. Rent in advance remains the property of the tenant until the last monthly withdrawal. If they leave before the end of the lease they are entitled to their remaining money back.

If a applicant qualifies and wants to pay in advance keep your life simple and tell them they can pay monthly like every other tenant. What a hobby landlord sees as a windfall could be a major pita.

I shared my experience in the other thread. And I’m definitely one of the newbie investors, as I only have two properties totaling up to 4 units. Not to mention my wife and I only started just over 1.5 years ago. 

From what I gathered from various forums, such as this one, was to establish a minimum set of qualifications for accepting tenants. This ensures you don’t discriminate and have a go-to system when you’re just not sure what to do. 

Here’s my experience with collecting a full years rent in advance. I did some online searching for laws in my city of Los Angeles that may not allow collecting advanced rent but could not find any. I didn’t confirm with a realestate attorney (which propably would’ve been a better idea). I screened the tenants against my minimum set of qualifications; which are a 650 credit score, household income double the rent, and clean background check. I looked closely at the wife’s credit history, as the husband was not a US citizen, so he didn’t have one (RED FLAG). She had a decent history showing she paid her credit cards, car payments, and student loans on time. Both the criminal background checks were clean. We signed a year lease with a security deposit of 1.5x the amount of rent, and upon its ended the lease would revert to a month-to-month. Tenants were basic in my opinion, only ever called me to have their water heater temp turned down. Later I discovered they moved in some family members and got a small dog, both prohibited in the lease. I didn’t make a fuss of it as the utilities we cover (water, trash, and alarm system) did not rise. Also, I didn’t wanna be the guy to take a little girls puppy away. Neighbors didn’t complain either. Their lease expired and they stayed for another 2 months. At the end of their lease I raised the rent by 5% to stay close to market prices. These units are not Rent Controlled. After making repairs, painting, cleaning, and fumigating (place was left with roaches) I returned their security deposit. New tenants moved in last week. 

WIth their advanced rent payment my wife and I opted to put the entire amount towards the principle of our mortgage. Luckily, they didn’t end their tenancy early, or else I would have had to return the money. 

@Peter Sinclair - it's the state of California that sets the deposit, not the city of Los Angeles. In California a landlord is only allowed to accept 2 months of deposit (doesn't matter, if they're called deposit or last month's rent) in addition to the current month rent. So, the maximum sum a California landlord is allowed to accept for move in is a total of 3 months rent. 

@Scott Trench

I've had only had one experience where I had someone pay for a year of rent in advance. It was a married couple. They had a large disability settlement, so they used a portion of it to pay a year's worth of rent. The year was fine, no complaints. Then the year was up and what happened? They didn't have any money. And I was forced to evict them.

What's funny is....I ran into them years later when the wife tried to rent another property from me! She looked at me like she couldn't place me and I was like "You know I was your landlord before, right?" Needless to say, they didn't get the new place.

At the end of the day, I learned that just because they have the money for the year's worth of rent...doesn't mean they have more than that. The best thing to do is make sure your potential tenants have a source of income before renting to them.

Originally posted by @Michaela G. :

@Peter Sinclair - it's the state of California that sets the deposit, not the city of Los Angeles. In California a landlord is only allowed to accept 2 months of deposit (doesn't matter, if they're called deposit or last month's rent) in addition to the current month rent. So, the maximum sum a California landlord is allowed to accept for move in is a total of 3 months rent. 

 (c) A landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months’ rent, in the case of unfurnished residential property, and an amount equal to three months’ rent, in the case of furnished residential property, in addition to any rent for the first month paid on or before initial occupancy.

This subdivision does not prohibit an advance payment of not less than six months’ rent if the term of the lease is six months or longer.

https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV§ionNum=1950.5

As a seasoned landlord since 2002, I have had a process in place for screening tenants that has worked very well.  However, when the market went haywire, there was a HUGE outpouring of Tenants into the rental market who had all kinds of credit issues due to short sales, BKs, Foreclosures and such.  These were the homeowners that bought at the top of the market, and then lost their shirts when the bubble burst, and made choices to short sale, deed in lieu, or just walk away from their homes, which left them with horrible credit, but in alot of cases, alot of money (because they stopped paying their mortgage and waited out the lender).

As landlords, it is easy to say that you have a process, and won't deviate from it.  However, when you have a market shift that dilutes the tenant pool to such a degree, you have to grow and adjust as needed in order to keep up with the market, and your business.  If you have never known such a market shift, CONGRATS!  You are lucky, and I hope that you never have to adjust.  However, in MANY markets (Phx and Scottsdale were 2 of them), there was a very long period of time where finding a tenant with NO credit issue was harder than one would think....and if you DID find a tenant with good credit, they wanted to buy a home now that the bubble had burst and homeownership was within reach for them.

In 2009, I had a tenant (with good credit) contact me to break their lease.  I don't offer this option, so it became a negotiation with the Tenant.  Upon their exit, I started showing and screening Tenants.  There were many applicants.  This was for an upscale townhome in North Scottsdale.  Great location.  Great community.  However, so many credit issues on these applications. No one was passing the test.  We had to make adjustments.

We ended up with a tenant who was just completing the short shale process of her home.  She was also going through a divorce.  Her most recent credit was not great.  However, her past credit was good, and her income was good.  She offered to pay us in advance for 6 months, pay a double Security Deposit, and give us pre-written checks for the second 6 months.  In AZ, it is illegal for landlords to accept more than 1.5 times the rental rate for a Security deposit, and no prepay rent can be required or requested by the landlord that goes beyond the security deposit limits.  Therefore, we told her that while that sounded great, we couldn't require it, but we could certainly accept her payments if SHE chose to make them in advance, and would apply them accordingly.  We never expected her to do that since it wasn't a requirement.

After the lease signing, she drafted a letter to us at her own initiative, with a check for the funds to pay for 6 months of her rent, and 6 individual checks to cover the months that followed.  We were shocked!  But in accordance with the laws in the area, we deposited them, and used them as the rent became due.

She has been an EXCELLENT tenant since 2009! She takes ownership of the property and treats it like her own. She notifies us when neighbors are violating HOA rules, or there are cars parked out front that she doesn't know about. She also takes care of items that the HOA sends letters about (they send HOA violation letters to both me, and the property) like a roof tile that fell down, a side gate fence that needed painting, etc. She just takes the initiative, and I can just send her funds for the expense (if any) and her time. For larger items, she contacts me right away, and I have it taken care of.

It has been a great experience.  She has been a great Tenant.  She has even been agreeable to rental rate increases over the years.  While she no longer prepays or sends checks, she always pays on time, and usually goes directly to my bank to deposit cash.

She is a great example, NOT to convince landlords that they should start throwing caution to the wind and accept credit issue tenants, but rather to open the eyes of some landlords who jump at the opportunity to voice their opinion about a market they may have not yet experienced.  Until you are faced with limited options, or a vacant property, you don't know how you will proceed.  WHEN the situation DOES present itself, you need to have a clear, and thought out process for how you can make adjustments that don't compromise your business model to the degree that it becomes a risk, but rather one that you can live with.

Anyway....that's my example.

Happy Monday BP! 

Originally posted by @Michaela G. :

@Peter Sinclair - it's the state of California that sets the deposit, not the city of Los Angeles. In California a landlord is only allowed to accept 2 months of deposit (doesn't matter, if they're called deposit or last month's rent) in addition to the current month rent. So, the maximum sum a California landlord is allowed to accept for move in is a total of 3 months rent. 

 Here’s what I found.. It seems that you cannot collect a certain amount of prepaid rent on month to month leases, however, on long-term lease, for example a one year lease, then that provision does not apply.

“Civil Code section 1950.5 imposes limits on security deposits. A landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months' rent, in the case of unfurnished residential property, and an amount equal to three months' rent, in the case of furnished residential property, in addition to any rent for the first month paid on or before initial occupancy. (Civ, Code, sect. 1950.5, sub. (c).)

That subdivision, however, does not apply to long-term leases of at least six months, in which advance payment of six months' rent, or more, may be charged.” - Attorney Anthony Roach 

Originally posted by @Matt K. :
Originally posted by @Michaela G.:

@Peter Sinclair - it's the state of California that sets the deposit, not the city of Los Angeles. In California a landlord is only allowed to accept 2 months of deposit (doesn't matter, if they're called deposit or last month's rent) in addition to the current month rent. So, the maximum sum a California landlord is allowed to accept for move in is a total of 3 months rent. 

 (c) A landlord may not demand or receive security, however denominated, in an amount or value in excess of an amount equal to two months’ rent, in the case of unfurnished residential property, and an amount equal to three months’ rent, in the case of furnished residential property, in addition to any rent for the first month paid on or before initial occupancy.

This subdivision does not prohibit an advance payment of not less than six months’ rent if the term of the lease is six months or longer.

https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV§ionNum=1950.5

 Didn’t see you had already posted it. 

I've been offered a full year rent upfront on numerous occasions, but have wisely never accepted it. In my experience, it has always been a red flag for a prospective applicant trying to hide something. 

I have allowed existing long term tenants to pay multiple months in one lump sum (I believe they liked to do this for budgeting reasons - eg not being able to spend money they've already spent on rent).

I’ve never accepted and would not accept 1 year lease up front.  I have been offered and accepted 1 year payment after initial 1 year lease was up without a problem.  After  6 months or so I have accepted 3-4 months payments at a time without a problem.  This only with proved good tenants.  To me it’s one thing less I have to worry about.  I did have to return part of a 1 year lease when a tenant was called up to Iraq.  Again not an issue.

I have an aversion to overly rigid criteria. I’ve been a landlord since 2007 and currently own 8 units; hope to expand to 10 in 2018. Still feel like a newbie, but I have had a TON of tenants over the years. Haven’t had to evict anyone yet -knock on wood ;)

The few bad eggs I’ve had paid late but did eventually pay. For me credit has been the biggest indicator of tenant quality. Bad credit = problems (generally speaking).

One of my “bad” eggs was a tenant who I allowed to pay 4-6 months in advance lump sums since he had bad credit, but was a med student who got lump housing stipends. His older brother co-signed for him and he was a friend of my cousin’s, so I gave him a shot. Nice guy, but he was a wreck with his finances and a total pain as a tenant...that said, I’m sooo happy I got that $ up front, otherwise I prob would have had to chase him down every month. All that to say, I’ve never accepted a full year up front but MIGHT consider it depending on the circumstances.

we should have standards as landlords but there are often grey areas - especially if you are renting in B and C areas versus A. So, I look at each applicant as a whole. I have a checklist of 5 categories I screen on and can work with someone if they pass 4 of the 5 and I don’t get a bad vibe, let’s talk. Some things I don’t see ever budging on, like a prior eviction.That’s a deal breaker for me.

My point is that while there are some hard and fast rules that work for most, none of this is gospel and I’m sure that there are some solid potential tenants out there offering to Pay lump sums to overcome not presenting the perfect application package. We also don’t all have the luxury of selecting from an endless line of perfect tenant candidates either...

You want real experience. OK I'm going to talk about  real experience of both what you say should be done (renting to people who satisfy credit criteria) and what you say should not be done (renting to people who offer a years rent upfront).

Part 1.

10 years ago I was a tenant.  I had a lump sum of cash and decided to offer my landlord 12 months rent in advance  to help my budgeting and  to see if the discount I got which would be risk free could beat  investing the lump sum. The landlords offered me a 10% discount for rent upfront and I I took it. They were happy I was even happier. True I could not have met an income and credit criteria when I offered the advance rent but that wasn't the reason that I offered it. It was will you give me a discount if I pay 12 months in advance, not will you overlook your tenant criteria if I pay 12 months in advance.

Part 2

I have twice been interacted with tenants who had great credit. 

They both took reasonably good care of the house.

They both paid their rent in full on time every month.

They both left at the expiration of their 12 month lease.

There was a vacancy before both units got filled.

Conclusions

There are perfectly legitimate reasons for offering rent in advance. Mine were budgeting and financial savvy and from what I've read here (which is basically how dare a tenant be in possession of a lump sum) some of you need to get over yourselves.

I am not interested in renting to tenants with great credit because of  tenant volatility  they bring. That  is not profitable

I've been a landlord for nearly 40 years, and I ran across a few request like these through the years. Usually it's people whose life style does not fit the norm.

As to local regulations that restrict advance rent payments, my NOO mortgage restricts the payments to about 3 months, so at the time, I advise the tenants that my mortgage does not allow it.

The most unusual case I ran across was a religious order downsizing, They had a convent that in better times housed over 300 nuns, now housing around 50. The religious order owns that building, will rent it out as a commercial property, and will rent a number of apartments for their members from the income.

It seems most norms go out the window. Instead of how long have you worked somewhere, it's how long had you been a nun? They do work for the order, and they're assigned to their work, one of the nuns is the principal of a school, but they explained that they don't collect a salary. In other words, they're guaranteed jobs. So, how do they pay for things? The answer was they don't get paid wages, but the order provides housing, food, clothing, what ever they need. And how about retirement, social security? They explained the order provides all of that, which is normally what a convent is for.

They explained that everything is paid through their central AP department, so paying annually would cut down quite  a bit of work. They explained that if paid monthly, they'll have to request payments through their AP department monthly, hope there's no delays, and wait for the checks.

Finally, I asked them if they have any ID. They have an ID card issued by their religious order, and told me it's a recent development. They explained there's scammers around claiming to be nuns.

So I have to decide, do I want to overthink the problem, or conclude it's doable. They say the church stands behind them, so do I need a guaranty from the diocese? They tell me they're told the rent from the former convent will cover the apartment rents. Is that's so, should I check into it, find out how much rent they'll be collecting.

Yes, I rented to them for 12 post dated checks. I did screening and confirm the were who they said they were. I even did eviction checks. And we got some checks mixed up during the year, depositing the September check for August. But all in all, it turned out fine.

I have had it work out just fine.  Just check where the money is coming from.

I have a SFH right now that was paid a year in advance.

The tenants both had a back-ground check, they were approved with a cosigner.

The cosigner was an aunt who is a real estate investor.

The aunt wanted to pay advance since she cosigned.

So, the yard is mowed, had 2 service calls.

I am not sure if I would do it again or not.

The question is, assuming you have more than one applicant do you feel advance payment is a plus. I personally see no benefit to it what so ever considering that legally the money remains the property of the tenant in all situations. If they leave for any reason, voluntary or eviction, the money must be returned.

If a tenant offering to pay in advance in some way influences a landlords decision to accept them over another applicant that landlord has displayed very poor judgement.

For those that did accept did you feel that this took away motivation on both sides? Typically in smaller contracts payment/withholding of payment is really the most powerful tool you have to ensure the contract is carried out. It's also easier to end the contract if neither side is owed significant portions of money...

Risks are on both sides, for example if landlord fails to make repairs (realistic or not) at the request of the tenant typically a tenant could deduct from rent or withhold. This also allows the landlord to move forward with actions to get the tenant to pay. If money is dispersed upfront both sides lose that leverage....

@Scott Trench like so many things in real estate, the answer is that it depends. I have been in the business since 2003. My experience is a mixture of agreeing to collect up front and denying people who offered this. There are four factors I consider:

1. Source of the money

2. Income to replenish 

3. Reason for paying up front 

4. Local laws 

I have taken prepaid rent from two tenants and denied two others. The two I denied was because the source of income was illegal or they were not paying taxes, which made it illegal. The two I took prepaid rent from were legitimate and I had no problems. I think some landlords immediately reject prepaid rent because it can be a sign of a scam or illegal income. It is easier to just have a firm policy, than it is to look at each situation case-by-case. 

Some have argued that if a tenant prepays rent that you cannot evict them. This isn't true. Obviously you cannot evict them for lack of rent payment, but you could still evict them for breaking other lease clauses. Of course if you go to evict someone, you must return any prepaid rent for time they will not be in the property. I also question why some people talk so much about eviction. Personally I try to avoid eviction. Even when I have had trouble with tenants not paying, they generally leave when I tell them to. 

My advice is consider all the factors and make a decision that is best for your business. Sometimes prepaid rent should be taken as a hard-no, but if you are able to otherwise qualify the candidate and prepayment is used as additional risk mitigation, I say go for it.

Hi there.

I had one tenant that paid a year upfront - a family that just sold their house but wanted to stay in the area so kids would finish school before downsizing. The father started his own business and wanted to make sure that housing is covered if his business wouldn't take off. 

I knew upfront they would stay only for one year. When they moved out, the house was spotless, so i didnt loose much as far as turnover costs. i still talk to them as we built a very friendly relationship over that year. 

my experience was positive but i do realize that there were risks in this situation. 

I do agree with another post in there - those are people whos' situation doesnt fit the standards and therefore, would require another look on landlords part. it is not so black and white sometimes. 

@Scott Trench the problem doesn't lie with how much you collect; it's Landlords that accept large payments in lieu of proper screening.

I've had nearly ten renters that paid a full year of rent in advance. One of them is still with me after five years and he pays a full year of rent every year in October. Another was a retired guy in his 70's that only came to town once every few months so paying in advance was a convenience. The other cases were all people that negotiated a small discount in exchange for paying the entire year in advance.

They were all excellent tenants. The reason is that we screened them first! I regularly get applicants wanting to negotiate terms and my response is always the same: after you complete my application process and I can verify you are a great tenant, then we'll consider negotiating.

Too many Landlords fail to screen. They accept the first person with cash in hand. Even if they do screen, they're far more likely to loosen their standards when they see a lot of money waving in the air.

Screen first. If they are an excellent prospect, then you can consider negotiating terms.

I have a tenant that paid 2 years up front and was and is a great tenant.  After his initial 2 years, he chose another unit of ours that was a little cheaper to pay for the full year.  He and his family is still there and doing very well as our tenants.  I know it may not be the norm but this particular situation has worked out great for us. 

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