Tenant Paying Rent in a Lump Sum: Good or Bad Idea

Greater Dallas/Fort Worth Area · Member since 2018 · 6 posts · 0 votes

I have a property that I rent to four college girls. One of them is using money from her financial aid assistance to pay rent. She recieves this rent in a lump sum and she asked if she could pay her whole rent for the remainder of the lease in one go. The four girls each contribute $400 to rent, and one of them sends the whole $1600 to me in one payment each month. So basically what she would do is pay me her whole rent from now until the end of the lease, and from then on, the remaining three girls would pay $1200/mo. Is this a bad idea? Does anyone have experience with this? It's a first for me. What are the pros/cons of doing this?

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Sharlene Mulchandani

Cincinnati, OH · Member since 2020 · 299 posts · 476 votes

@Chandler Corn I think that her paying upfront might not be such a good idea. It would definitely make things messy if the tenant violates or breaks their lease agreement. Also, each state has varying rules regarding upfront rent payments, so I would double check your local and state laws if you're considering it.

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Sharlene Mulchandani
Cincinnati, OH · Member since 2020 · 299 posts · 476 votes
5y
@Chandler Corn I think that her paying upfront might not be such a good idea. It would definitely make things messy if the tenant violates or breaks their lease agreement. Also, each state has varying rules regarding upfront rent payments, so I would double check your local and state laws if you're considering it.
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Chandler Corn
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Greater Dallas/Fort Worth Area · Member since 2018 · 6 posts · 0 votes
5y
@Sharlene Mulchandani thanks for the response! How specifically would it make things messy? What makes you say this?
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
5y
@Chandler Corn
This is a bit tricky. I don't know what an accountant would say or a lawyer from their perspectives, but what happens when one of the other tenants "falls behind?" I'm guessing your lease does NOT say X amount for tenant 1, Y amount for tenant 2, Z amount for tenant 3. So, if this one tenant gives you a lump sum for the remainder of the term of the lease, if you don't receive another payment for a few months, you have no recourse since the "tenants" are all paid up (until her amount is "used up"). They may not realize this, but could.
So, it could get somewhat stressful as you maybe wondering what are the rest of the tenants' plans for paying you if they "fall behind."
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Beth Vandroff
Property Manager · Lakewood Ranch, FL · Member since 2020 · 13 posts · 4 votes
5y
Chandler it would depend on how the lease is drawn up and worded. My daughter lives in a townhome with 4 girls & each pay on their own but carries their own lease so if one backs out you can deal with them individually.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
5y
Paying rent up front is fine, but watch out for a couple things:
1. Don't ever accept a renter just because they are willing to pay in advance. Many of them will offer to pay up front as a means of enticing you to skip the screening process or to be picked ahead of other applicants.
2. Money is not earned until it's applied to a rent charge. If the tenant pays in January for 12 months of rent, it's not your money to spend. You have earned January rent, but not the following months. Only use the funds as they are earned. If the renter ever terminates early, you are obligated to return the funds unless they are applied towards existing rent charges. If the tenant leaves six months early and trashes the place, you may be legally restricted from spending any of the rent money on repairs or cleaning.
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Chandler Corn
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Greater Dallas/Fort Worth Area · Member since 2018 · 6 posts · 0 votes
5y
@David M. That is a fantastic point I hadn’t considered at all. If she pays $400x6 months sometime in the next few weeks, they’d have a “paid rent” amount of $2400, then on December 1st they’d owe $1,600. So I guess I’d really only be at risk for that one month. Since on January 1I could still go after them if they didn’t pay since they’d only have contributed $800 to that month (2400-1600). Wonder if the risk is worth it to have that extra cash flow locked in, so that in the instance I have to evict or something I’ve already gotten 25% of the rent I would’ve been getting anyway. (Also worth noting I highly doubt I’ll have to evict or anything like that. The school they go to is like $45k/semester tuition so their parents are helping)
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Chandler Corn
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Greater Dallas/Fort Worth Area · Member since 2018 · 6 posts · 0 votes
5y
@Nathan G. Thanks so much for this info. This makes a lot of sense, and would also solve the issue that David brought up since I wouldnt technically have recieved that money until the rent is actually due. Are you aware of any regulations about having to keep the money in an escrow account or anything like that? Or is it like deposits where so long as it is paid back (in this case in the instance of a breach of contract), it is okay for it to be held in an ordinary bank account. I live in Texas
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
5y
Originally posted by @Chandler Corn:
@Nathan G. Thanks so much for this info. This makes a lot of sense, and would also solve the issue that David brought up since I wouldnt technically have recieved that money until the rent is actually due. Are you aware of any regulations about having to keep the money in an escrow account or anything like that? Or is it like deposits where so long as it is paid back (in this case in the instance of a breach of contract), it is okay for it to be held in an ordinary bank account. I live in Texas

I'm not familiar with the Texas law. I can tell you that my law doesn't address it, but I still hold it in the account and apply it to the rent charges each month. I definitely recommend you don't spend it until it's earned. If something happens (death, early termination, etc.) you don't want to have to come up with $10,000 to pay the renter back.

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Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
5y
@Chandler Corn @Nathan Gesner I think it depends on how your lease is written. I'm not an attorney, but I think our standard lease would allow the owner to keep the entire rent payment to satisfy the lease or damages. We don't normally have an "early" out clause that wouldn't allow us to collect. You are in a bit of a different situation with allowing 4 people on the lease and split payments, so not sure what lease you are using for that.
I like it when they pay up front. Some GI bill people do that, some students, some who just sold their home. Less risk you are not going to get paid, by someone who understands they may not have great money discipline.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
5y
Originally posted by @Bruce Lynn:
@Chandler Corn @Nathan Gesner I think it depends on how your lease is written. I'm not an attorney, but I think our standard lease would allow the owner to keep the entire rent payment to satisfy the lease or damages. We don't normally have an "early" out clause that wouldn't allow us to collect. You are in a bit of a different situation with allowing 4 people on the lease and split payments, so not sure what lease you are using for that.
I like it when they pay up front. Some GI bill people do that, some students, some who just sold their home. Less risk you are not going to get paid, by someone who understands they may not have great money discipline.

I don't know the law of every state but there is generally a provision stating you can't keep rent from two different occupants AND you must make a "good faith effort" to replace a tenant that breaks the lease.
If your tenant breaks the lease six months early and moves out September 30th, you should clean the unit and put it back on the market to find a replacement tenant. If someone moves in October 31st, you can only charge the former tenant with actual damages of cleaning, repairs, and lost rent for the month of October. Everything else would be refunded. If it takes three months to find a replacement tenant, you keep three months of rent. You typically can't keep six months of rent as a penalty and put another tenant in the rental at the same time.
Even if you have that kind of penalty spelled out in your lease, that doesn't mean it would stand up in court or that it would be fair. I agree with penalizing people for breaking the lease but I think penalties should be reasonable.

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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
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@Chandler Corn
Glad to be of help. Between my point and the others, it’s a bit of a minefield. Of course, none of it matters as long as everything goes right. Just make sure you have a way forward in case something goes wrong. To be proactive, it might just a simple conversation with the tenant group. I did that one time with a trio of friends who rented from me. It was much easier once they realized that all three were on a single lease, not three individual leases. Good luck
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