Tenant Is Offering Full Year Rent In Advance

Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes

My stellar tenant of two years plans on renewing his lease this month. He called me today to ask if he could pay a full year’s rent in advance for a ten percent discount. I told him I’d have to think about it and get back to him. As of right now, I’m leaning towards taking his offer. I plan on using the immediate profits towards a down payment on a new property.

Curious to hear what you guys would do in my situation?

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Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

Originally posted by @Joshua Gordon:

Curious to hear what you guys would do in my situation?

Two thoughts:

1. Your lease should include an annual rent increase to keep up with cost of living and market rates. Your tenant should have a 3% increase this year so a 10% decrease will actually put you 13% behind market, possibly more. On a $1,000 rental that would equate to $1,560 lost in one year. I know some good charities that could use that money.

2. Just because you receive money today doesn't mean it's yours to spend today. The rent payment is earned the day it's applied to a charge. If you receive $12,000 today, you would apply $1,000 of it to November rent and keep the rest in your account. In December you would earn another $1,000 and so on. Why? Because there are many reasons why your tenant could legally break their lease and get that money back. If your tenant called on January 10th and said they broke the lease and moved out, that money is not yours to keep. You have to make a good faith effort to find a replacement tenant. Once the new tenant takes over, the old tenant is cut loose and his money has to be refunded.

I knew a lady that managed over 100 vacation rentals. Guests would put money down to reserve a rental and the manager would take her commissions and spend it. Then the guest would cancel and she would have take money from another reservation to pay back the guest. She was over $250,000 in the hole, robbing Peter to pay Paul.

Don't spend it until you earn it. The same applies to security deposits.

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Matthew Siemaszkiewicz
Member since 2019 · 1 post · 1 vote
6y
@Natalie Kolodij
You def get my follow lmao
1 Reply
Account Closed
Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Joshua Gordon
I love those type of tenants! "A bird in the hand..."
1 Reply
Account Closed
Member since 2019 · 1k+ posts · 1k+ votes
6y
@Angelica M Garzon
Will depend on local laws. Where I’m at a term tenancy can be any length the two agree to and tenants don’t need to give notice to vacate at the end of the defined term. I generally set everything up as 12 month term, rent due monthly. But 12 month term, rent due annually would be 100% legal here.
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Joshua Gordon
OP
Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes
6y
@Luke Saglimbeni Yeah that’s what I’m leaning towards doing. My logic is that the 10% hit will be worth being able to acquire a new property that is also cash flow positive. That said, I need to think about it some more before I go through with it.
1 Reply
Joshua Gordon
OP
Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes
6y
@Ola Dantis I’m not too worried about what Joe brought up as our lease agreement would take that into account eliminating any possible issue. To your second point, if you take another look at what I wrote originally I mentioned that I’m using the Profits to acquire another property - that’s after setting aside the capital necessary to service the mortgage.
1 Reply
Joshua Gordon
OP
Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes
6y
@Blaine B. From my understanding, I’m profiting 10% less annually than I otherwise would and therefore taxes would be less. However, I’d need to go over this with a tax expert to know for sure.
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Joshua Gordon
OP
Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes
6y
@Angelica M Garzon Good point. I would definitely draft a stipulation covering that risk in the lease.
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Joshua Gordon
OP
Rental Property Investor · Chicago, IL · Member since 2019 · 7 posts · 5 votes
6y
@Natalie Kolodij Good questions. The funds needed to cover total annual expenses for the first property would be set aside from the lump sum payment. The remaining profits would be toward a down payment on the second property.
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Alan Hale
Rental Property Investor · Dallas, TX · Member since 2019 · 6 posts · 1 vote
6y
@Joshua Gordon I would say go for it if you believe you can take the money and make better than a 10% ROI in another investment. As they say a bird in hand is worth two in the bush. Also good luck in Seattle! I've got you on my fantasy team. Lol
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Chris Hansford
Rental Property Investor · Bloomington, IN · Member since 2019 · 7 posts · 1 vote
6y
@Joshua Gordon I would go ahead and agree, put their entire year payment into a money market account, and pull from it monthly to cover bills and expenses...this way if something “comes up” and they try backing out you’ll have it set aside and won’t be an issue retrieving it since it will be liquid.
1 Reply
Stephen Glover
Property Manager · Richmond, VA · Member since 2018 · 204 posts · 297 votes
6y
Most responses thinking like an "investor" and not like a "business owner." I believe that someone who invests in real estate needs to wear both hats.

A lot of responses here doing calculations on maximizing your returns and putting money here or there to grow portfolio, negotiating the discount, etc. but that's missing the bigger picture. I'm referring to what @Nathan Gesner posted, specifically the "#2" portion of his post. For what it's worth, I agree with him and think this is the best advice so far. Tenant can still leave (insert number) days after full discounted prepayment and get their money back. Essentially, you're just agreeing to take a discount on rent from a tenant that you already know will and can pay full amount. No benefit for you.

Plus, you will have agreed to violate the lease terms. It likely will be difficult trying to argue the point in court that you "only agreed to violate that one part of the lease. The other policies are still in tact" when another violation happens or the tenant wants their money back.

In my humble opinion, run your business the way you planned and don't let the tenant run your business. I've turned down offers for prepayment, even in full, for those reasons and more.

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Account Closed
Member since 2019 · 16 posts · 2 votes
6y
@Joshua Gordon
Don’t! ...Take quarterly payments otherwise you have a Contract for 12 months and you will have a hard time evicting. Sure he’s amazing but that’s now... maybe the cartel cousins move on day 1 of the new lease period. Also in the least you would have to refund the rent if he goes. AND, you now have that lopsided income for taxes vs regular income between tax years.
0 Reply
Andrew Millard
West Bend, WI · Member since 2016 · 18 posts · 13 votes
6y
5% would be the max discount to even consider. Even then I don’t see how it’s worth it.
I have rented small warehouse space for years. Used to pay quarterly just because I hated writing checks or would forget. My landlord actually prefers getting checks every month instead of up front for 3 months so he “doesn’t spend money I don’t have”
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
@Joshua Gordon i hope you are reading the posts that indicate you cannot spend the $$ this tenant gives you - you leave yourself open to a huge risk of having to return money you no longer have and in general the money is not yours until it is earned.

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Luke Saglimbeni
Rental Property Investor · East Longmeadow, MA · Member since 2019 · 154 posts · 64 votes
6y
@Natalie Kolodij since when does rental real estate have to be on the accrual basis of accounting? He can be cash basis? I am making logical educated assumptions on facts given, and if put in the same situation would basically do the same thing. I am sure the OP is smart enough to invest in only cash flowing properties. The biggest assumption is if it is legal to do so, consult with a local RE attorney. The biggest lesson in this post is regarding time value of money. Don't forget the basics of this and the power of compounding 8th wonder of the world.
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Luke Saglimbeni
Rental Property Investor · East Longmeadow, MA · Member since 2019 · 154 posts · 64 votes
6y
@Joshua Gordon I would double check to ensure everything you want to do is legal. And as another poster mentioned, see if you negotiate that discount % lower. Run some #'s. Good luck and let me know how it goes.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Luke Saglimbeni:
@Natalie Kolodij since when does rental real estate have to be on the accrual basis of accounting? He can be cash basis? I am making logical educated assumptions on facts given, and if put in the same situation would basically do the same thing. I am sure the OP is smart enough to invest in only cash flowing properties. The biggest assumption is if it is legal to do so, consult with a local RE attorney. The biggest lesson in this post is regarding time value of money. Don't forget the basics of this and the power of compounding 8th wonder of the world.

Literally not sure where you're getting accrual accounting from.

Landlords are cash basis- which is why he would recognize the entire payment when received NOT when he incurred expenses.

I'm going to stop going back and forth now.

I understand time value of money, I understand cash flow. Without knowing however, how much cash flow the existing property makes and how much expenses we don't know if it would work.

Like I said earlier- Only IF 1 year's rent (less) 1 year's expenses on property A = Enough for a down payment on property B does this make sense.

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