Hi BP Landlords!
I own a SFH rental property. Two female friends applied together, a Nursing Student and a Grocery Store Manager. Student has pretty good credit (650), Grocery Gal has no credit history and is building (zero debt, just out of a long term relationship where she did not even have a bank account).
The rent is $1,500 a month, the student wants to pay her half of the year in full once her student grant clears next week just to get it out of the way and not worry about a rental payment.
The Grocery Store manager will be paying her $750 share monthly from her full time gig (she makes $2,150/mo)
How do I write up this lease so both tenants are on the hook if Grocery Gal stops paying? I was thinking of putting the grant money into an escrow account and drawing from it monthly maybe?
Part of me wants to ask her to just pay me monthly, but $9,000 up front seems foolish to pass up. I'm slightly stumped here.
You can search for this on BP and see the myriad of responses...
To directly answer the question I would simply write the lease the way I always do $1,500/mo. Simply explain to them that rent is always 'joint and severally liable' meaning it doesn't matter where the $1,500 doesn't come from for the month they both get evicted. So if grad student wants to pay 100% up front no issue, but in June if grocer gal doesn't pay then the full $1,500 comes from the 'escrowed' amount and grad student can get her friend to pay up or double up in July. I would not under any circumstance imply or say that somehow you'll be involved or responsible for separating who is paying and who is not....'joint and severally liable'...
Write the lease in the usual way showing that rent in the amount of $1,500 per month ($18,000 per year) is due on the first of each and every month. Both Tenants will be jointly and severally liable for the entire rent.
Accept the Student's lump sum payment of $9,000 (1/2 x $18,000). The student's money will be debited to an account called Tenant Rent Deposits (an "income" account for prepayment of rent) and credited to an account called Tenant Rent Deposits (an "other liabilities" account - an obligation you owe to apply to the rent).
The two tenants are jointly and severally liable for the full amount of the rent. If the Grocery Store manager fails to pay her rent, the Student will still be liable for the full remainder of the rent. She will also learn a valuable life lesson!
Updated about 1 month ago
I wouldn't waste any time explaining joint and several liability to the two tenants.
@Matt Devincenzo seems so obvious when you put it like that, thanks Matt!
You put quotes around “escrow” do I actually have to open an escrow account in this circumstance?
That's going to depend on your State. I believe you'd handle it the same as whatever your State's security deposit guidance is. Legally you have some obligation in that the funds are held before being earned (you have money for rental periods that haven't occured yet) so make sure you keep an accounting even if just internally. I have a small savings account I stick deposits in so I make sure it's not spent, I'd stick it in that and then transfer the amount earned each month, but my State doesn't require a separate deposit account.
@Matt Devincenzo great stuff, thank you for the guidance man.