What should you do when a renter offers to prepay several months of rent in advance? When a prospective resident offers this as an incentive to choose them for one of your properties, should you take them up on it?
When operating multiple houses for rent in Georgia, prepayment of the rent may seem ideal, but it can also lead to trouble if you're not careful. Check out our Atlanta property management insights about when it's okay to accept prepaid rent—and when it could be a sign of trouble.
The Concept of Rent Prepayment for Rental Properties
More cash in hand is always a good idea, right? In some cases, yes. However, the concept of prepaying rent can seem strange to some investors. Why would a renter want to give you more money than they owe you in a particular month? Don't renters usually wait until the last minute to pay the rent for the current month only?
In a hot real estate market, property owners see more prepayment offers than when apartments or single-family rental homes are not in demand. When a renter really wants to live in your property and inventory is scarce, they might offer to pay several months in advance to secure your home and start a new lease. Offers to prepay are also common when a renter has a poor credit history or bad referrals from former property owners—and a potential resident wants to skip the background check.
How can investors know when it's a good idea (or a bad idea) to accept prepaid rent? Here's what our Atlanta property management team wants you to know.
Why Prepayment of Rent Could Be Good
There are plenty of good reasons to accept prepaid rent, but make sure it's the right choice to protect your rentals and income.
If you have a resident that travels frequently and is gone for weeks or months at a time, accepting rent in advance can be a good idea to ensure you get paid on time. This might also help your renter not have to worry about coordinating a payment or two while they're away.
An Atlanta property management company knows that prepaid rent can also be a good relationship builder with renters who don't get paid every month and need to cover rental payments on a different schedule than other residents with more "normal" income situations.
With extra cash in your pocket, make sure you work with your accountant to set up a system for managing those funds. Several months' worth of rent must be allocated across those months as income and applied to monthly expenses accordingly.
Potential Downfalls to Accepting Prepaid Rent
While more cash in hand can be a good thing, an Atlanta property management group advises there are some downsides to the prepayment of rent. If a potential renter resists setting up their online portal to pay the rent each month and prefers to give a cash payment upfront, that could be a sign that they don't have a reliable source of income. Accepting that payment and starting a new lease could leave you without rental income when the initial prepayment runs out in a few months.
Prepayment of rent can also be a tool an applicant uses to help you overlook blemishes in their background screening. Residential property managers know that if a lump sum of cash can persuade you to skip a background check or your usual tenant screening process, you might end up with a bad tenant that never pays another dime to live in your property beyond that initial prepayment. You also won't know if you've chosen a renter with a troubling criminal history or prior evictions.
Property management companies also know that tax implications need consideration. Depending on when you receive the prepaid rent, you'll need to apply it as income in the tax year that you receive it. If the funds are meant to cover rent into the new year, you could face a tricky tax situation or miss out on potential deductions.
Weigh the Pros and Cons
Ultimately, the decision to accept prepaid rent is up to a property owner and their accountant. Weigh the pros and cons of the timing and the resident, and consult a property management expert if you're not sure that it's a good idea to let a renter prepay.
In most cases, accepting prepayment could be a risky decision if you don't have a good relationship with a renter who has a track record of paying the rent on time. An Atlanta property manager knows that for potential renters during the screening process, never accept cash in exchange for skipping the critical screening process!
Atlanta Property Management Companies Collect the Rent!
Whether you choose to allow prepayment from a renter or not, a property management company can collect the rent for your houses for rent in Georgia! The right Atlanta property managers can assess a situation to make sure it's in your best interest to accept prepaid rent or not.
Renters Warehouse Atlanta understands that it's most important to protect your rentals and bottom line. If you're not sure what to do with an offer of rent prepayment, reach out and learn more about how we can help!
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