tenant paying 1 year rent in full, good or bad?

63 Replies

Hey everyone,

I just recently bought a rehabbed property in KS, MO. my PM just informed me that someone is interested in renting the property. This individual just hit a jackpot and wants to pay the one year rent upfront. According to the PM, they will still do a background check on her and she will still pay a deposit and it's just her and her daughter apparently. Anyone have any experience dealing with tenants like this? Are there any potential downside to getting all the rent up front? Thank you.

@Yu Chen it's usually a red flag and they are trying to "bribe" their way in to your property. If they hit the jackpot and want to pay a year in full, it could be because they are very bad with money, which could be trouble.

At the very least, I would not accept the full payment up front, as that could lead to eviction issues on your end, if needed.

If you decide to go that route, have them pu the money in an escrow account and have them pay you from that account. That will give you the necessary leverage, if you need it.

I would still run them through a typical background check. If it is reasonable then I wouldn't have a problem renting to them. 

I would do inspections and make sure they do take care of your property and comply with your lease.

The PM could hold the advance payments in escrow on your behalf.

It is usually a sign of a low credit score, but credit scores don't determine good tenants. I would take the year's worth of rent and put them in the home. I would not expect them to renew the lease or stay past the year. In the meantime, you have money to work with. A fool and their money are soon parted.

@Anthony Dooley it's not legal to keep the rent in most, if not all, states if you were to evict them. That's the problem, they've paid for the year, so evictions are more difficult because you've accepted a year of payments

@Jason D. That is not a true statement. Most rental agreements state that if the tenant violates the lease agreement, they still owe the remainder of the rent for the agreed term, usually 1 year. If the contract is for 1 year, and they have already paid for 1 year, they still have to abide by the rental agreement. Contract law.

You can still evict if they pay upfront, you just give them their refund. It's all in how you run your lease, just make sure you're in compliance with how the rental funds are handled. Typically they must be in their own account and some must cases if you're taking a big payment like that upfront it can get weird if you have to evict but just issue the pro-rated refund and move on. 

@Ronald Starusnak No. If you have a 1 year rental agreement, they are expected to stay and pay for 1 year. If they pay it all up front or monthly, it doesn't matter. If they fail to comply with the lease agreement, they can be evicted, ie. pets, lawn care, care of the property, etc. An eviction is a court order to gain possession of your property back from the tenant. There is no refund due if they do not stay the entire year. 

Originally posted by @Anthony Dooley :

@Ronald Starusnak No. If you have a 1 year rental agreement, they are expected to stay and pay for 1 year. If they pay it all up front or monthly, it doesn't matter. If they fail to comply with the lease agreement, they can be evicted, ie. pets, lawn care, care of the property, etc. An eviction is a court order to gain possession of your property back from the tenant. There is no refund due if they do not stay the entire year. 

 You're completely right. 

@Anthony Dooley, I am not familiar with other states, but in California, a security deposit of up to 2 months for an unfurnished rental is the most that may be collected (plus 1st month rent) at lease signing. And any money that is collected, whatever it is called (pet deposit, last month's rent, cleaning fee, or even advance rent) is considered to be part of a security deposit.

As @Jason D. states, one alternative may be for the landlord to put the money into an escrow account and then withdraw an amount equal to rent every month, but as @Ronald Starusnak states, if you evict you are essentially terminating the lease and any money remaining from the collected amount may have to be returned (less appropriate legal fees).

@Anthony Dooley no sir....if you evict, you can not simply sit on your hands for the remainder of the year and collect rent. You have to make a reasonable effort to re-rent the property of you intend to continue to collect rent from the previous tenant. Once re-rented, the previous tenant is no longer liable, and you would have to return any pre-paid rent. If its proven that you made no effort to re-rent, you're open to being sued by the previous tenant.

@Jason

@Jason D.  I believe Jason is correct on the legality of this.  I don't believe on a state by state basis you are not allowed to collect rent up front and if you do I believe it has to be held in a special account and if you evict you have to have a pro rated return on that said account.  I would double check just to be safe,

Prior to owning I rented an apartment and paid for 1 ful year upfront.  I did it because I knew I was staying for at least 1 year, I was out of town a lot and didn't want to be late with rent. My bills are always paid on time or before time.  They still did a background check and all was well. 

We had tenants for 8 years who rented a FL home we own. They deposited their 7 months rent the day they arrived, then utilities when they came due. A couple of years they left early due to a family emergency & never requested a refund.

We also have several tenants that pay their rent several weeks in advance when they get a big payout for a job etc. I'd take advanced rent any day.

Originally posted by @Nick Ferrari :

@Jason

@Jason D.  I believe Jason is correct on the legality of this.  I don't believe on a state by state basis you are not allowed to collect rent up front and if you do I believe it has to be held in a special account and if you evict you have to have a pro rated return on that said account.  I would double check just to be safe,

 This may apply in your state as a property manager for other people, but there are very few restrictions when managing your own property. Landlord tenant law has well defined rules, but two parties can agree on almost anything as part of a lease agreement.

Originally posted by @Jason D. :

@Anthony Dooley no sir....if you evict, you can not simply sit on your hands for the remainder of the year and collect rent. You have to make a reasonable effort to re-rent the property of you intend to continue to collect rent from the previous tenant. Once re-rented, the previous tenant is no longer liable, and you would have to return any pre-paid rent. If its proven that you made no effort to re-rent, you're open to being sued by the previous tenant.

 In order to evict the tenant, you have to have a reason. If they violate the conditions of the lease agreement and are consequently evicted, they do not get a refund. Of course you would put the property up for rent without delay, it's a business. The previous tenant cannot sue you if they violated the lease resulting in a legal eviction. 

@Yu Chen every state is different. Generally speaking it’s a red flag. I will say that some people like to pay up front so they don’t have to hassle with remembering to pay on time or late fees. If they have good credit and good rental history you should be fine.

@Anthony Dooley If they sign a 1 year lease, pay you for the full year, you evict them month 2 and re-rent the property on month 3, you will own the previous tenant 9 months rent back, plus the security deposit minus damages. No judge will allow you to keep that money.

This is why I would not take a full year up front, because There is very little advantage to doing so, but a number of problems that can arise

Originally posted by @Anthony Dooley :

@Jason D. That is not a true statement. Most rental agreements state that if the tenant violates the lease agreement, they still owe the remainder of the rent for the agreed term, usually 1 year. If the contract is for 1 year, and they have already paid for 1 year, they still have to abide by the rental agreement. Contract law.

I had an NOO mortgage, and the mortgage docs state that I cannot collect more than 2 months rent in advance. That was because there was a time when landlords got mortgages, collects rent a year in advance, then skip town.

With that in mind, I had some tenants, due to reasons other than bad credit want to pay a year in advance. Best case, had 2 nuns from a religious order who wanted to do that. Reason? All expenses are paid by the religious order's A/P department, and processing it monthly is a pain. BTW, they receive no W2 income, in other words, no paychecks and all expenses, food, auto are paid by the religious order. So it's a bookkeeping problem, not a bad credit problem. For me, it was an issue of determining if they were really nuns, not some imposters.

BTW, the reason for the nuns renting is the convent which originally housed 500 nuns, by then, housed less than 100, and they are converting the building to offices for commercial rental. So even though they got no pay checks, they're provided shelter, food, and everything else.

What I did was have them give me 12 post dated checks for the year. Then in talking to the bank manager when I mistakenly deposited a check post dated some months in advance that it's no problem, I can legally deposit a check post dated for April in January. Told her I originally got 12 post dated checks, and got 8 more to go, and the renter wanted to give me a year's rent. The bank manager told me if I bought all 8 in, deposit them, there would be no problem, from what the bank can see, though it would be a good idea to tell the people who issued the checks that I be doing it.

Updated 5 months ago

One further thought. While many people feel that there must be something wrong with a tenant paying a year ahead. I was floored when I was told investors actually collect a years rent and skip town, hence the prohibition in the mortgage.

@Yu Chen , while this seems like a good thing, there are several reasons for you to be cautious.

1. With rent paid in full, the PM may not feel any need to contact the tenant. Could be good, could be a red flag. A tenant who is looking to manufacture meth in your home will be happy for no contact with the PM, won't call for repairs, etc. Ditto someone growing marijuana, renting it out on AirBnB, or using your property for any number of other nefarious purposes. (Do people still mine bitcoin, @Steve Vaughan ?)

2. As others have said, you would have to return any unused funds should you evict. Not the windfall it seems at first glance.

3. If they are so bad with money that they need to pay 12 months in advance, what happens on month 13? 

4. Screen them as you would normally. If they do not meet your criteria, move on. It is far better to have an empty unit for an extra month, waiting for a qualified applicant, than to put someone in who does not qualify, and then have to evict, repair, etc.

In other countries (middle eastern etc) payment for the entire lease term is expected before the keys are handed over. This is not the case in the states. What you might suggest they do is set up a bank account specifically for rent, and have it direct deposit each month. In that way, they would have moved the money out of their itching fingers, but it would still be paid according to the first of the month the lease agreement asks for.

If they are collecting welfare, and they have a huge chunk of money come in, they can lose their benefits and may be trying to spend it all quickly. Unless you know more of their situation, the reasons they want to do things may or may not make sense to you. Regardless, you don't want to be put in the position of becoming their financial advisor.

@Jason D. Right, the Courts (in MN anyway) would not likely allow a landlord to evict a tenant who paid a year in advance w/o a lot of 2nd chances (unless really weird/egregious) to cure lease violation, and, if evicted, and re-rented, the year pre-paid up-front balance remainder would be ordered back to original tenant, minus damages etc., noting, how it actually would work (could work) is lease and state law specific.

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