Ever consider collecting all rent up front for a discount?

Question

I know that when a new tenant offers to pay upfront its a red flag. However, for an existing (good) tenant anyone ever consider offering a plan where rent can be paid in advance in return for a discount?  I am in software sales, and this is a common practice we employ when doing deals.  It can be for a 6 month or 1 year period, and have a sliding scale of discounts?

Why I am thinking about this?  In my experience I have found even good tenants have life circumstance or unforeseen economic hits come that they are not prepared for.  With unemployment at a historical low, inflation remaining sticky and a Fed that is determined to slow down this economy I think it is a foregone conclusion that unemployment will go up substantially, meaning collecting rents can get harder.

Nathan Gesner · Answer

No.

1. This is a red flag. Many tenants ask to pay an entire year up front to weasel their way into a rental they otherwise wouldn't qualify for. Many Landlords will see the "easy money" and ignore red flags about the tenant. It's also a way for Tenant A to jump ahead in line of other applicants.

2. The money is not truly earned until it's applied to a charge. If you spend all that money in January and the Tenant breaks their lease six months later, you will have to look for a new tenant and then refund any unused portion of the rent that was prepaid by the departing tenant. If you've already spent it, this could be a serious financial burden.

James Hamling · Answer

@Amir Navabpour aside from the various reasons many are pointing out, I think your missing the basic fundamental here.

Tenant's are most often tenant's, because they don't have a giant pile of cash they are sitting on.

Most often if a person has a sizable enough pile of cash they are sitting on, say where they could comfortably pay a years rent up-front, there also well capable of buying.

So in essence, your asking how do you get a home buyer to instead of placing a down on a property, instead hand it to you for use of a property for 1-yr, and 0 equity. So there idiots on top of it all.

So your looking for an idiot, with a pile of cash, to rent from you, AND you're willing to lower your rents for it, because that's what it is when you "discount", your lowering your rents.

Starting to see the full picture here? Doesn't make much sense does it. I don't like renting to idiots, they do idiotic things.

I want to rent to the waitress finishing last yr of med school and primed for a great improvement of life and income. The divorcing Dad who earns well but needs 2yr transitional housing. The relocating person looking to have decent housing while figuring out exactly where and what to buy, because there more methodical and risk averse to just buying now and figure out later. These are my target market, who pay well, on-time, take great care of a property, and are thankful of the property.

I don't need to ask full yr up-front because I lease to a better tenant class.

And if your wanting the $ up-front, to spend it up-front, ooooh-man, your just itching for a hurting. So many ways that can go sideways fast.

Jake Andronico · Answer

@Amir Navabpour

The only time I've done this was for a few months (from April 2020 - August 2020). It worked very well and almost all of my tenants decided to pay in full through the rest of the lease. There was significant peace of mind for those few months.

But as a strategy to REI in general, I don't see it being typically very feasible. However if you were selective and offered this to a (good) tenant, I'd be curious what they said.

If the thought process is that "unforeseen economic hits come that they are not prepared for", in theory all of their reserves would be tied up in the remainder of the lease.

This could cause things to get wonky if/when they needed money for an unforeseen circumstance, and they could regret that decision to pre-pay their rent and start negotiating, demanding, etc. Just food for thought, but interesting idea.

Steve K. · Answer

I agree with others that this potentially causes more problems than it solves. If your good tenant turns bad and needs to be evicted, it complicates things if they’ve already prepaid a bunch of rent. I’ve seen good tenants turn bad many times, often when their ex/ baby daddy gets out of jail and moves directly in despite not being on the lease then starts causing problems, or an adult child same scenario, or the tenant falls off the wagon all by themselves, gets a new roommate who has issues, etc. things can go south quickly when dealing with humans and sometimes the cleaner the break, the better. From a legal standpoint (in my non-lawyer opinion of course), it’s definitely safest to not demand advance rent payments as a landlord. If the tenant proposes it, that’s a little better but definitely not a good look to propose this as a landlord. In some states you’ll have to keep that money in a separate bank account/ in escrow and may even need to have a surety bond of pay interest on that money. Doing this could also have negative tax implications (rental income is typically offset by expenses, but if rent is paid in advance in one tax year it might not balance expenses for that year, causing you to pay more taxes that year than if it were spread into the next year). Also it over complicates accounting IMO, I like to keep things as simple as possible as I scale my business and use the same policies for all tenants to avoid being accused of discriminating.

Greg M. · Answer

Many states, including the one you are in, will require you place the money in escrow. This is a PITA.

The discount is going to need to be at least what they could earn on that money in a simple investment. That's going to be at least 5%. No way I want to lose $600/year per $1000 of rent on the very slight chance that something unforeseen happens to the tenants.

If market rent is average risk, why find a way to make less to compensate for risky tenants? Why not find a way to charge more for risky tenants?

Nicholas L. · Answer

nah.

just pay what's in the lease, on time.  my bank won't do it either.  i just set the payment and forget it.

Patricia Steiner · Answer

Don't do it...often times it's best to learn from others' hard won lessons than actually discover those for yourself.  This is one.

David Dachtera · Answer

There may be auto-pay options at the renter's bank that could be worth exploring, though if I were to go that route I might see about an escrow company such that the renter can make one large deposit, then the escrow company makes their monthly payment. Not sure how the escrow charges would balance out. I'd need to run the numbers. The renter would probably need to add a year's worth of escrow charges to their deposit.

When I started renting back January of '17, I had just sold my house and had cash enough to pay in advance. That way, whatever the year would bring, I'd at least have a roof over my head as long as I could keep up with the utilities. The property manager balked at it. Everything worked out o.k. since I was also newly eligible for social security which kept me afloat until I got established on a part-time job.

My $0.02 ...

Theresa Harris · Answer

Absolutely not. There are far too many things that can go wrong.

Ever consider collecting all rent up front for a discount?

Most Popular Reply