Tenants Who Pay a Full Year Upfront

Scott Trench · 2017-12-11T13:46:50-08:00

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.

Stephen E.

St Thomas, Ontario · Member since 2013 · 575 posts · 408 votes

8y

@Thomas S. spells things out quite clearly regarding Ontario. Under the Residential Tenancies Act it is illegal to hold any deposit other than last month's rent. There was a court case that said that if a tenant themselves volunteered to pay rent in advance as a means of reassuring a landlord as to their desirability as a tenant than it was OK for a landlord to accept, providing this came solely at the initiative of the tenant and was not made a condition of a tenancy decision by the landlord. You can immediately see the problem here - a crooked tenant wanting to back out of such a prepaid rent arrangement need only file with with the Landlord and Tenant Board claiming that they were required to make advance rent payments under duress by the landlord and hey presto - a full refund is due. Plus potentially sanctions for the landlord.

I have never accepted tenants with prepaid rent because it is against my screening standards to do so and because it is effectively against the Residential Tenancies Act to do so as explained above. Recently I have had two undesirable prospective tenant applicants flash cash before my eyes in an effort to get me to take them as tenants. One offered to pay several months rent up front in exchange for tenancy. That tenant proved to have concealed prior addresses and a troubled tenancy featuring late and nonpayment of rent culminating in a midnight flit on a one year lease. Corporate landlords can afford to have a certain percentage of their units go bad like that. As a small landlord one bad unit is a greater proportionate loss and so I exercise greater care. The second guy was very eccentric, acknowledged any credit check would reveal a bad credit history including he claimed lawsuits. He offered a large sum of cash then and there in exchange for keys and proposed he would move in from the hotel he was occupying. No. These are not desirable tenants and their cash comes at far too high a price, and as Thomas explains it would probably have to be returned in any case. But as he also notes, these up front cash offers do seem to be proliferating amongst professional tenants in Ontario and are out there for the unwary.

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Paul C.

Rental Property Investor · Henderson, NV · Member since 2013 · 96 posts · 33 votes

8y

I can share my experience both as a landlord and as a tenant. As a landlord, we had a tenant that just retired and wanted to pay us a full year in advance. That was great, but she couldn't pay rent when the year was up and ended up being evicted.

As a tenant, I've paid my landlord a year in advance 5 years running now. The reason I did it was the discount he offered easily beat the 1% I would've gotten in the bank.

So I guess at the end of the day, it depends on the tenant's motivation for paying in advance. If it's because they ran into an unexpected windfall, then you might want to look for other factors that show they'll be financially responsible enough to pay rent when the first year is up. If they're doing it because they're financially savvy and want to save a little money (assuming you offer a concession for upfront rent), that's probably a safer bet.

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Amy A.

Portland, ME · Member since 2012 · 616 posts · 550 votes

8y

I have accepted 6 months of pre-paid rent from 2 different tenants for the last 2 years with no problems. This is because they are graduate students whose student loans are dispersed twice per year. Other than the lack of regular monthly income, they passed all screening. One had $200k of student loan debt, but they just keep piling it on!

I would never do this for an applicant who had bad references from previous landlords or terrible credit.

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Jennifer T.Pro Member

Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes

8y

Talk about a newbie landlord. I took 6 months rental payments in advance with my very first tenant. I had no idea it might have been against landlord-tenant law. I still don't know, I've never looked it up. It actually turned out great.

The two red flags is they were moving from out of state and were going to find jobs once they got here. But they were currently working where they were living. And, with their occupations, they could easily find jobs in my area. I checked their work and landlord references. All of which were excellent. They volunteered their bank statement to prove that they had been saving for a long time for their move. For whatever that was worth, their balance was in the five figures. I also had it written in the lease what would happen to the excess rent, if the lease was broken. Basically, that I would keep it until I found another qualified tenant.

They were fantastic tenants. They both got jobs after about a month of living here. It was a 1-year lease but, as their 6 months of rent were about to end, I offered to them a $50/month discount if they wanted to prepay again. They declined my offer, which was fine, and paid their rent on time every month after that.

They gave me 6 weeks notice when they went under contract for their first home. By the time they moved, they had lived in the unit for 13 months. Left it in perfect condition. My husband and I joked with them that, while we were happy for them buying their first home, we were really bummed for ourselves.

Now, with more experience, I see the pitfalls that could have happened. I'm not saying I wouldn't do it again, but I wouldn't charge forward as gleefully and with no cares in the world as I did last time, lol.

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Derrick E.

Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes

8y

Just came here for the comments since I was one of the people posting in the other thread and voting on people's posts lol

Since we are all sharing stories. I pre-paid my rent 6 months at a time for 3 years while in college. I wanted to make sure that I had rent covered before anything else. My land lord took it. I wasn't even smart enough to ask for a discount at the time lol. Either way, I stayed there for 3 years and I like to think I was an overall good tenant (for a college kid that is.)

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Jade Miali EverettBusiness Member

Real Estate Consultant · Sebastopol, CA · Member since 2017 · 41 posts · 17 votes

8y

The only time that I have ever accepted a year's rent in advance is when it's a student and the parent cosigner is putting the money down for them (or financial aid like mentioned above). I've never met anyone else who could afford it and would be suspicious if they could... at that point why not buy a house?

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Tenniss Pierce

Member since 2018 · 2 posts · 2 votes

7y

I just had to add because I've seen so many negitive comments about the kinda of reasons not to accept it or how the people must have bad this or scam that...

I myself pay my rent in full for the year, when I get my taxes, I am a single mom ta 2 girls and it gives me the freedom to be able to take off work if and when needed for them, it gives my the assurance that if anything happens or comes up I can afford to handle it without falling behind. I dont pay it up front to scam anyone but to secure myself and my children.

4+ years paying in full

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Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

7y

@Tenniss Pierce , thanks for sharing. This makes sense, although most people won't be able to do it. Did you explain this to your landlord or did they just not even ask?

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Tenniss Pierce

Member since 2018 · 2 posts · 2 votes

7y

@mindy jensen most don't ask they just assume i'm crazy. Most times I just put into savings and withdraw monthly. Self control is key in that though so I prefer to just pay full. But even paying full I've never had anyone let me get a discount.

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Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

7y

Here is a question for those that have, as tennats, paid rent in advance. If the landlord said no to your offer of advance payment would you look else where for a landlord that would accept the cash.

Lets assume the cash was not an attempt to negotiate a reduced rent.

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Ned J.Pro Member

Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes

7y

As is common in real estate, there are few situations that warrant a NEVER answer...this is one of them.

The biggest thing you need to consider when the subject comes up is..... WHY do they want to do it? There can be some situations where it makes sense and is reasonable.....but in my experience its often a huge red flag that they are hiding something or trying to bribe you to overlook some deficiency on their end. A big lump sum of cash can be "bait" to make you do something you wouldn't normally do. Screen thoroughly and trust your gut....don't get glassy eyed by a big sum of cash and do something stupid just because you get the $$ now

My gut also tells me that if a tenant has to get rid of his $$ quickly to pay rent way in advance before he/she doesn't something stupid with the $$ and cant pay the rent each month, the rest of their life is probably a train wreck too and its only a matter of time. But again, that's not always the case, but I'm playing the odds of that being the case

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Anthony Rivera

Member since 2019 · 6 posts · 2 votes

6y

Many posts indictate that if the tenant moves out, the landlord must return all remaining pre-paid rent. That doesn't apply if the tenant breaks the lease and is responsible for the remainder of the rent due under the lease agreement, or 2 months rent, depending on whether there is an early termination addendum. Am I wrong?

I have a applicant for my $1300/mo rental in a senior community, who has a 720 credit score, is 58, retired, has savings from a home sale, and has a pension of $750/mo, and is offering a full year, plus security dep, up front. Thoughts on this and above?

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Daryl Luc

Member since 2019 · 226 posts · 107 votes

6y

Originally posted by @Anthony Rivera:

Many posts indictate that if the tenant moves out, the landlord must return all remaining pre-paid rent. That doesn't apply if the tenant breaks the lease and is responsible for the remainder of the rent due under the lease agreement, or 2 months rent, depending on whether there is an early termination addendum. Am I wrong?

I have a applicant for my $1300/mo rental in a senior community, who has a 720 credit score, is 58, retired, has savings from a home sale, and has a pension of $750/mo, and is offering a full year, plus security dep, up front. Thoughts on this and above?

Back up...they are not responsible for the remainder of the rent. Find a local attorney who is versed in landlord tenant law for your state and get their input because I'm only knowledgeable about mine. If you get pulled into small claims by a tenant who wants their "xtra" rent back, most likely a judge will ignore what you have in your lease regarding money owed, breaches etc. and look to you to explain what you have done and are doing since the move out to re-rent the property as fast as possible. Ok? Read that again. Now, if you are re-renting or making every effort, the judge will not let you keep all the rent. One, two months max is usual and customary.....even in a crappy (slow) market. It would be called 'unjustified enrichment' to allow that to happen if you were holding several months rent that was unearned and sitting on a vacant or even worse, a newly occupied with a replacement tenant. How much will you keep....I don't know. It depends on the circumstances and situation, but you are not in the driver's seat.

As one other response shared, any rent in hand beyond the security deposit and first month (+last if your state law permits) is not income in hand until the accrual transfers one month rent from the xtra security deposit account into the rent received account. This is not a paper xfer but an actual transfer from an interest bearing account for that specific pile of money (not to be co-mingled with another tenant's deposit) into your operating funds account. Do most landlords set themselves up this way...probably not. But your first trip to the IRS will set you straight ... tute sweet. The interest belongs to the tenant, not the landlord! It becomes a proportioned distribution based on security deposit funds used for end of lease operations based on damages and general chargables. If half is used for rehab prior to re-renting...then you split the interest earned 50/50. You need to ask yourself if you are up for all the record keeping.

You also need to ask the obvious...what else is a prospective tenant paying up front in advance...their car payments? Not likely. Their credit card bills....not likely. Groceries, gasoline, utilities? You know why...there's not a single advantage to freezing their money into someone else's account without access to it. So on face, my friend, there's no advantage to either party...so why do it? WIFM= what's in it for me?

1 Reply

Anthony Rivera

Member since 2019 · 6 posts · 2 votes

6y

What's the purpose of a lease if it does not bind the parties to their mutual obligations? It sounds like you're saying that the tenant can walk away from a lease and be made whole (having the money returned) while the owner suffers a loss.

So, with that in mind, let's consider a tenant with a one year lease, who pays on time as per the lease agreement. Then, 7 months into the lease, and with no early termination addendum in place, packs up and leaves 5 months before the lease ends. Does the tenant owe the entire balance of the lease term? Or, does the tenant owe nothing at all. For this hypothetical, assume this just occurred and that the landlord is making every effort to re-rent, while seeking compensation. Will the court actually wait to see how quickly the landlord re-rents or will render a judgment. And, let's assume that the tenant showed up in court and stated that they broke the lease because they simply found something they liked better.

PS. I understand that "tone" can be misread in the written language, so I carefully choose my words. I made a statement and asked if I was wrong, and asked for thoughts and comments. I don't understand your "back up" remark, and while I can't speak to your intent, it came off as rude. Just saying. Let's keep it civil please.

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Daryl Luc

Member since 2019 · 226 posts · 107 votes

6y

Back up as in your hypothesis isn't based on reality. I don't know what state your situation is in, but most likely there's not a single law on the books there that runs counter to what I explained. A lease is a contract. A contract requires the following: performance, compensation and competency. Tort, the law of contracts prevails regarding what is and isn't enforceable.

A lot of people put stuff in leases that aren't enforceable....unless the tenant succumbs to believing what's printed. A tenant that walks and wants their prepaid rent returned probably knows a lot more about contracts than you do. There are tons of leases with signatures on them that weren't written by a lawyer, weren't reviewed by a lawyer (by either the landlord or the tenant!) I suggest for your situation, if not a 'what if', you get with a local attorney and have them explain to you what is and what isn't.
My opinion as to your second 'what if', no... you don't get to keep the 5 months rent. As I said, just about any court in the country would see a civil charge against you for unjust enrichment and if found against you for trying to keep 100%...punitive damages would be a likely outcome. Double or Treble depending on statute. What's the amount you're entitled to? That's why you need an attorney to pose these questions to before they happen.

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Anthony Rivera

Member since 2019 · 6 posts · 2 votes

6y

I'm in Florida. You are mistaken

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Charles Kennedy

Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes

6y

While I'm not too experienced (have had this rental for a little over a year) I had a tenant at a student housing property I own with a friend pay upfront for the whole year (twice now that he has renewed). It was the student's grandmother who was paying and we were perfectly fine with that. His other roomates pay each month. He has been an extremely easy tenant and renewed for a 2nd year at which time his grandmother paid the entire 2nd year upfront. We now bill each month for utilities, which we've had no trouble collecting on.

It would have been more of a red-flag if it wasn't a student, but the situation made sense (grandmother probably didn't want to hand the grandson a lump sum, but did want to help out by paying upfront for housing).

2 Reply

Ned J.Pro Member

Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes

6y

If a tenant pays a full year in advance and then leaves early, the landlord is entitle to any early termination feel in their lease and/or the rent until they get it rented again. In court they will have to document all their efforts to get that unit rented again in a timely fashion....maybe 2 months. They don't get to keep all the rent from the remaining lease and leave the unit un-rented or re-rent it and keep both rent payments....not how a lease works in court. There are ALWAYS exceptions to the rules, but in this business, you mitigate risk.... you cant eliminate it. In my opinion accepting a full year rent is a risk on many levels that I choose not to take. In a high % of cases....not all...... they are buying you off to cover something up....not all....but a significant portion of them.... no thanks

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Nichole M.Pro Member

Investor · Fairfax, VA · Member since 2017 · 7 posts · 1 vote

6y

I had a tenant pay a year upfront after he had been vetted and accepted by our condo board (this was a NYC condo) - he was a very wealthy man who travelled a lot and he seemed to have automated a monthly bill like rent by paying it up front. At the time though, I was an inexperienced investor so I wasn't a good steward of the money, so when he ended up moving out, I had to sheepishly admit I had spent the money and then enter a plan to pay him back. Very embarrassing but a good lesson on keeping business funds in a lockbox and use only as directed.

1 Reply

Stacee Evans

Investor · Canoga Park, CA · Member since 2016 · 113 posts · 50 votes

6y

I had a tenant pay for a year up front. He had an inheritance and didn't want to worry about rent for the year. It worked out. A month before the year was up, he told me he would be moving out and wanted his deposit back. I explained he will get it once he moves out and he was fine with that. He ended up planting beautiful flowers, took great care of the the yard and house, and in the year never called me for a repair. The only problem was that he didn't stay longer. Taking a year rent should probably be looked at on a case by case basis.

1 Reply

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

6y

I have had quite a few pay up front in the past. I almost never had issues with them.

1 Reply

Anthony Rivera

Member since 2019 · 6 posts · 2 votes

6y

I accepted a prepaid rental agreement and have had no issues. Meanwhile, the previous tenant, with the standard monthly rental agreement, broke their lease 5 months prior to expiration. Both had excellent credit and references. If everything checks out, you are no better off one way or the other. Neither situation is iron clad. Just because a situation is uncommon, it doesn't make it worse, in the same manner that if a situation is common, it doesn't always make it best. Employ due diligence and use your judgment.

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Shelley ClementsBusiness Member

Real Estate Consultant · Ardmore, OK · Member since 2020 · 43 posts · 14 votes

6y

@Ryan Swan I agree, in my onion it has been a red flag!

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Greg H.Pro Member

Moderator

Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes

6y

My guess is in today's world, many many many landlords would love to have had a year's rent upfront

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Anthony Rivera

Member since 2019 · 6 posts · 2 votes

6y

Even if a landlord, like myself, gets a year's rent up front, we can't spend it. We must deposit it in an account, interest bearing or not, and withdraw the rental amount each month when due. Not a penny more. Why? Because if this tenant breaks their lease, they are only out the amount reflected in the lease under early termination. (if you don't have a clause, you should) All other remaining rent, not otherwise due, must be returned to the tenant, along with any security deposit that may be due back.

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Tenants Who Pay a Full Year Upfront

Tenants Who Pay a Full Year Upfront

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