12 Mos Rent Up Front- Yes or No
I began looking for a tenant for my new rental property a few days ago and have received a lot of interest. One of the applicants qualifies in every way (clean background check, good credit score, non-smoker, etc) except that she has no income. She was previously married to a wealthy individual and currently lives off of the divorce settlement. She has offered to pay the full lease term (12 mos) upfront since she has no regular verifiable income. Is there any reason I should not accept her as a tenant that I’m not thinking of? It would be her and her 4 year old daughter occupying the home.
I would do it.
I would also right in the Lease that if she doesn’t live up to the standards of the Lease she will forgo all rights to the rents paid, and standard eviction process will begin immediately. This may entice her to stay with in the rules of the Lease Agreement in every way.
I also have experienced people who make the most promises also make the most lies. Be aware if you start to notice this habit.
Good luck and I look forward to hearing what you decide to do.
Originally posted by @Mike Anderson:
Hello,
I have had these kind of offers/renters before. The only thing you need to watch out for is where is the true money source. Make sure it's not drug dealing money or something like that.
You might not know where the money comes from when rent is paid with cash or credit cards. But with checks and debit cards, you know the rent money comes through a bank. This provides another pair of eyes because banks must follow the know-your-customer rule.
Not sure what the issue is. Making a person appear as a thug just because they want to pay ahead of time??? We have paid loans ahead of time so does that mean I’m a shady person? The gentleman that referenced greed is he renting his units out at cost only because he is just giving back to society? Anything out of the normal is not always bad. Not everyone even has a rental history so how would you check with the last two landlords?
Originally posted by @Account Closed:
Originally posted by @Mike Anderson:Hello,
I have had these kind of offers/renters before. The only thing you need to watch out for is where is the true money source. Make sure it's not drug dealing money or something like that.
You might not know where the money comes from when rent is paid with cash or credit cards. But with checks and debit cards, you know the rent money comes through a bank. This provides another pair of eyes because banks must follow the know-your-customer rule.
banks follow the profit rule, if the profit generated from the transaction is greater than the fine imposed IF caught all is well.
Look at HSBC for example of this...
Originally posted by @Account Closed:
Not sure what the issue is. Making a person appear as a thug just because they want to pay ahead of time??? We have paid loans ahead of time so does that mean I’m a shady person? The gentleman that referenced greed is he renting his units out at cost only because he is just giving back to society? Anything out of the normal is not always bad. Not everyone even has a rental history so how would you check with the last two landlords?
It boils down to a trust-but-verify issue. There are alternative ways to do this when paycheck stubs and rental histories are not available.
For example, someone with no visible means of support might be running a meth lab (Google "meth lab tenant" to learn how expensive this can be for property owners [who are responsible for the cost of cleanup]). But someone with no visible means of support might also be a millionaire who inherited the money, won the lottery, or cashed out stock options from a start-up, and now wants to take time off. The meth lab person might not have a bank account, while the millionaire probably does.
Sounds good to me!
No issue on my end. Make sure you account for it appropriately for income tax purposes.
Pretty risky! But 12 months is certainly enough time for her to find gainful employment. And if she proves to be a difficult tenant, you could always change tenants after the 12 month period. If she passes the background check, what more could you ask for?
I would ask a real estate atty
Like @Greg H. said and like has been said in other threads about this topic... in Texas take the money with a smile. Lots of rich people would rather pay the full lease instead of letting look into their financials.
We have done it quite a few times. It worked out fine. Knowing the source of the money helps.
Love the idea. Of course, as everyone else has said, vet them just like any other tenant. The only difference is the income requirement, which (IMHO) is nullified by the 12-month prepayment. Credit checks and other financials are only there to see if they have the ability to pay the rent. Pre-payment takes care of this. Now the only thing left is, "Will she be a good tenant?". At the end of the lease she'll either re-sign (which means another vetting process - with, perhaps, another 12-month prepayment!) or vacate, which would be the same for any other 12-month contract. What's the possibility of requesting a 24-month contract and pre-payment? Does this change your risk tolerance? It would for me.
Personally, I'd do it for the experience alone if everything else checked out.
@Thomas S. Clearly Thomas, you are not familiar with different ways of structuring a divorce settlment, and your comment comes off as very patronizing.
It is not unusual for an individual to get a lump sum settlement in lieu of regular income, particularly from high net worth spouses. I know of a couple people whose divorces worked out that way, and trust me, they would have zero problem with paying their rent. @Jeorgia B. - If she checks out otherwise including your gut feeling, she and her daughter will likely be fine tenants.
I've done this 1 time. It works fine for some, but it was a horrible mistake for me and I won't be doing it again.
Tread cautiously.
Originally posted by @Blair Poelman:
I've done this 1 time. It works fine for some, but it was a horrible mistake for me and I won't be doing it again.
Tread cautiously.
why?
I have done it twice and it worked out great, but I have also turned down three people offering it. This is not black and white. I would likely rent to this person after checking out details. I would take the cash up front and when month 11 hits, ask for the next 12 months. If she doesn't have the money then she can move out.
I agree that "all cash" can be a sign of a poorly qualified tenant or someone involved in illegal activity, but that is not always the case. One of my tenants was semi retired business owner, who had considerable funds in the bank. The other had received a settlement and asked for a cash up front discount, which I gave her. She had a job and previous rental references. The ones I rejected were involved in illegal professions.
@Roshan K. If you're not collecting rent regularly then you have no reason to call or check in with the tenant outside of regularly scheduled walkthroughs - which were really too far apart back then.
In my case, tenant checked out okay - professional working athlete, fairly well known, made plenty of money, passed background check, and references checked out. He paid the full year up front, and the first quarterly inspection was fine - the place was kinda messy but nothing stood out as an issue. But then he disappeared between the 1st and 2nd quarterly walkthroughs. Turns out he went to jail after kidnapping and beating his ex-girlfriend and her new lover damn near to death (the guy is now in prison for life, so I guess he's done paying his rent...)
Turns out the incident happened a few weeks after the 1st quarter inspection, so the place was vacant for almost 3 months without me or management knowing. 3 months is PLENTY of time for multiple groups of squatters to run through it, neighborhood kids to have their way with the place, etc... The interior was completely wasted - $30k damages in a 1100 sq ft. home. It looked like they held the NFR bullriding competition in the place.
In my opinion, the real problem with payments made that far in advance is the elimination of any need for management or the owner to check in on the property. Most renters need to be managed, so if you have a reason to interact with the tenant on a regular basis, then great. However, most management companies and owners want to deal with the tenant and the toilet as little as possible, and making a rent payment usually indicates the tenant is still actively living in the place.
There may also be statutes that require any advance rent payments to be held in escrow or a trust account until the monthly due-date or a default occurs.
When I sold my house and moved to another state, I was worried I wouldn't be able to qualify as a renter (no income). My realtor, who is also an investor, told me I had assets, and she turned out to be right.
I found out from an online forum that some apartment owners are required to document the income of their tenants because the commercial lender wants to make sure the cashflow from the property is enough to comply with the covenants of the loan. These buildings are usually large (hundreds of doors) and the leasing office is staffed with clerical types who have strict rules they must follow. A BiggerPockets landlord is usually a smaller entrepreneurial type who can make a judgement call in these assets-but-no-income situations.
Nothing wrong with this but you want to be sure to record the extra funds as prepaid rent which is a liability to you. Meaning you can't spend that money until you earn each month of it. Worst case scenario is 6 months down the road you evict for some reason or the tenant moves out for some reason, a judge could make you give the unused months back and if you've spent it... it's coming out of your pocket.
Thanks so much for your comments! You’ve made some really good points. As an update to my question, I decided to move forward with another applicant. After running a background check on the individual who offered the full 12 month payment upfront I found an eviction on her record that she did not disclose. Additionally, it came out that she is a smoker and “non-smoker” is one of our minimum qualifications. When I asked her about the eviction there were a lot of inconsistencies in her story.
We had 12 applicants for the property (which means I unintentionally underpriced it) but there was a mini-bidding war so we were able to get a little more than we asked. All in all, I think we got a good renter! Time will tell.