Lorain, OH · Member since 2017 · 111 posts · 53 votes
hey BP, I have a quick question. I have a tenant that just started renting this month. everything been fine so far she even paid today. two days before the first. Now she wants to pay a couple months in advance. should i allow her? feedback please thanks
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
@Will Kirkendoll I'll chime in to say, it depends on the situation. I definitely wouldn't 12 months up front. But if it's a one year lease, and someone wants to pay three months in advance, it's not really an issue especially for a good reason. One of my tenants is active military and was away for a bit for training so wanted to pay in advance. No issues.
Regarding the transferring the rent one month at a time between separate accounts, I think that's over complicating it. Through the years my CPA has always stated are long as the rental income it stated in the correct year on my Sch E, it's fine. There's no requirement to keep separate accounts and transfer money back and forth.
Real Estate Agent · Austin, TX · Member since 2017 · 229 posts · 259 votes
7y
Nope, nope, nope. It's an accounting liability and gums up your books. Also, my experience is that many people who try to pay in advance are worried about future money issues. I always followup my refusal to accept future rent with an automatic withdrawal option provided by my rent collection platform.
Real Estate Agent · Austin, TX · Member since 2017 · 229 posts · 259 votes
7y
Originally posted by @Account Closed:
@Beau Fannon can you elaborate on it being an accounting liability?
Think about it. You are accepting rent you haven't earned yet. So if you accept 12 months rent in the current month, you can only count 1 month's worth toward your revenues. The remaining 11 months are booked to an unearned revenues account which is a liability account. You'll need to deposit the 11 months unearned rent to an escrow/savings account separate from your operating account and make transfers every month you earn the rent. This requires more cumbersome accounting operations in your books. That looks terrible on your books if you need to acquire financing and your books are reviewed. And what happens if the tenant is able to successfully break the lease?
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
@Will Kirkendoll I'll chime in to say, it depends on the situation. I definitely wouldn't 12 months up front. But if it's a one year lease, and someone wants to pay three months in advance, it's not really an issue especially for a good reason. One of my tenants is active military and was away for a bit for training so wanted to pay in advance. No issues.
Regarding the transferring the rent one month at a time between separate accounts, I think that's over complicating it. Through the years my CPA has always stated are long as the rental income it stated in the correct year on my Sch E, it's fine. There's no requirement to keep separate accounts and transfer money back and forth.
Regarding the transferring the rent one month at a time between separate accounts, I think that's over complicating it. Through the years my CPA has always stated are long as the rental income it stated in the correct year on my Sch E, it's fine. There's no requirement to keep separate accounts and transfer money back and forth.
Generally Accepted Accounting Principals would beg to differ with you.
Your CPA is speaking from a tax filing perspective which takes places after year end. That's not the same as managerial accounting which is what is in question here.
I have 30 plus tenants. They all pay at the first of the month every month. Why would I make my business more complicated to make my tenants life easier. No thanks.
Real Estate Broker · DFW · Member since 2015 · 350 posts · 270 votes
7y
@Will Kirkendoll ask your tenant why they want to pay early. When i was renting I post dated checks for 3 months of rent at a time to my landlord. Just because i didnt want to waste time dropping them off monthly, because i was busy at work, or because i didnt want to forget. It’s not always a bad thing
Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
Did you ask her why she wanted to pay a couple of. months early. Maybe she will be on vacation. It's not amnestying accounting nightmare. Take the money and make sure she pays the next rent what it's due. I often overpay a utility bill and doubt if it blows up their accounting system.
Rental Property Investor · Dyersburg, TN · Member since 2019 · 45 posts · 31 votes
7y
@Will Kirkendoll I would agree that prepaying can more times than not indicate a less than stable financial situation. All the more reason to take the money while they have it. As far as accounting hassles mentioned I think that’s a bit extreme. Rent is non refundable so just book the income when it’s collected and there is no inventory or service being exchanged I don’t know why it needs to be complicated. Besides if you have any kind of property management software it will more than likely take care of that entry and credit the rents each month to offset the prepay as the rent charges occur. If it doesn’t do that then you should look at other software options available.
@Beau Fannon not if their books are cash basis... this only becomes an accounting headache using accrual basis
Harrison, this is even worse for a cash-basis investor. Please tell me you are not advocating for a cash-basis investor who almost certainly has a lease that crosses calendar year end, to accept prepaid rent for multiple months. Why on Earth would you advocate for a cash-basis investor to recognize several months worth of income in the current tax year and leave the expenses to offset it for the following tax year?
As far as accounting hassles mentioned I think that’s a bit extreme. Rent is non refundable so just book the income when it’s collected and there is no inventory or service being exchanged I don’t know why it needs to be complicated.
Derek, the act of renting property is defined as a service.
The Bureau of Labor Statistics NAICS code 53 Real Estate and Rental and Leasing is defined as a service.
IRS Publication 527 (2018), Residential Rental Property uses the term service over 100 times.
My grad school business dictionary defines a service as a valuable action, deed, or effort performed to satisfy a need or to fulfill a demand.
I hate to break it to you, but you, sir, are in the service industry.
Also, the tax ramifications of your advice are less than favorable.
Chicago, IL · Member since 2018 · 546 posts · 227 votes
7y
I'm in agreeance with Beau on this; the fact is, as a rental property owner you are in a service industry, and considering tax implications of receiving those large sum payments up front, it could in retrospect cost you more (time + money). You also don't want that liability.
If you're putting your business at risk to make your tenant's life a little easier, that's a personal call.
Question for @Beau Fannon (great advice, btw)— what platform do you use for rent collection? And what aspects of the platform do you find most beneficial?
Rental Property Investor · CO · Member since 2019 · 16 posts · 9 votes
7y
I've had two instances where students rented and because they get a big chunk of their stipend at once, wanted to pay me for six months at a time. I've allowed it and not had any problems. My bookkeeping system easily accommodated it though.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
7y
A whole lot of people providing accounting advice when they are not qualified.
Most taxpayers are cash basis. That means when you collect it then it is considered income for tax purposes.
For accounting under GAAP (which isn't a factor in this situation) it would be a liability for the amount of "unearned" rent for future months. You have issues in the event of an eviction or other issue where you may have to return a portion. I would consider a clause or memorandum detailing that if it is paid upront it is considered paid in and nonrefundable except in VERY specific circumstances.
Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
7y
I had several tenants with these issues.
One in particular was a group of nuns. They're closing their convent that used to house several hundred nuns, now houses 50 or so. They're converting it to an office building and renting it out.
The plan was to house the remaining nuns in a dozen or so apartments. I rented a 2BR to 3 nuns, but they requested they pay a year up front. Why? The religious order pays the rent and the process of paying it is a pain, but it's not a money issue, it's their internal procedures. The religious orders pay for all their bills including, food, rent, auto etc. and all such payments are submitted to their AP department.
What did I do? I ask them for 12 post dated checks. For them, the hassle of getting 12 checks is the same as getting one check. So for several years, I get my rent once a year, and in fact accidentally once deposited one check a month early. The bank, Citibank, told me it's no problem as I can deposit all the remaining post dated checks, as they don't pay attention to the check dates. So it's actually my choice to make 12 trips to the bank.
When I was a tenant, I had a job that involve extensive travel, several months at a time sometimes. I had a friend hold the rent checks, and submit them for me. But once, I had a an unexpected extension of a trip, had to stay a month longer. Result was I got back a few days after the first of the month, and I got a nasty notice of upcoming eviction on my door if I didn't pay the rent. Some years later, I had a similar problem and looked into bill paying services where they would submit payments for you such as rent. This is years ago before electronic payments. When the issue with my business trip occurred, it's either I take care of an emergency for my employer, or the landlord had a wait a few days more for his rent, and I figured my employer is more important.
My suggestion is to ask for several post dated checks.
I would not accept it, unless extenuating circumstances require. It’s best to accept just a month at a time in my opinion. With multiple properties, it would be confusing and more chance for error on my part. Some may think of it has a finically responsible person but it could also mean the opposite. When screening tenants, some may try and bribe you with three , four, five months rent in advance for immediate move in but it is usually because of something they do not want you to find out in the background check. If you do not have a company policy, it would be good to have one, even if just a few properties. You can then tell them it’s against company policy. You aren’t seen as the problem then.
@Beau Fannon not if their books are cash basis... this only becomes an accounting headache using accrual basis
Harrison, this is even worse for a cash-basis investor. Please tell me you are not advocating for a cash-basis investor who almost certainly has a lease that crosses calendar year end, to accept prepaid rent for multiple months. Why on Earth would you advocate for a cash-basis investor to recognize several months worth of income in the current tax year and leave the expenses to offset it for the following tax year?
Most every smaller investor is on a cash based system. I bet over half the people on BP don't even know the difference between cash and accrual based accounting. (If you don't know the difference - you are on cash based). I have accepted advanced rent from several tenants and never had an issue. Yes, it can increase income for the current calendar year, but it has the opposite effect of decreasing income for the following calendar year. This year I had advanced rent, but also had larger expenses, so it was no issue having the added income. The only caution I put out there is some states have specific rules around advanced rent which would be a good reason to not accept it (mine doesn't).
In this specific example they want to pay two months rent in advance, which keeps them well within the 2019 tax year. You could have a tenant pay the full year on January 1 and in a cash based system it would be no different than taking rent each month.
Lorain, OH · Member since 2017 · 111 posts · 53 votes
7y
thanks all for all the feedback. I don't know the reasoning yet I was at work when my assistant told me and I posted the question on here. I think is just because maybe she got her income tax back and wanted to pay a couple months ahead. thanks again everyone
Rental Property Investor · San Diego, CA · Member since 2019 · 102 posts · 43 votes
7y
@Will Kirkendoll
I would take it all day. We have in house cpa and it’s not even an accounting problem. We would actually love to have this problem but in our area renter can barely come up with deposit and a month rent so giving 4 months rent ahead that’s $10k most Renters doesn’t have that kind of saving.
Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
7y
@Will Kirkendoll Not the end of the world either way, but I would look at it with your goals. Do you want to scale a real estate business? If so, I would act and perform the same way now, that you would if/when you own 100 units. Having a tenant pay x months upfront is not (as easily) scalable. Better to have a uniform lease and rules, follow them and make the tenants follow them. Don't pick up bad habits like making exceptions early in your career.