Is It Possible To Collect The Entire Year’s Rent Upfront?

March 31, 2023 0 comment

Written by: Eric Davis

The Washington Landlord-Tenant Act is silent on rent control policies, meaning that Washington landlords are free to set their own rental rates, at whatever level they deem necessary to cover their expenses. Hence, receiving upfront payments for several months can be enticing and appealing. But a few things must be taken into account before accepting these upfront payments because receiving advance payments could create difficulties in the future.

Due to the beneficial effect of upfront payments, tenants are subject to being more trusted by landlords.

An image showing someone is paying.

TYPES OF RENTAL PAYMENTS

1. Rent paid in advance, except for the month that follows the payment, is referred to as a rent prepayment.
Another type of rental prepayment is what many call the Last month’s rent. Requesting a renter to pay it in advance is reasonable if you are concerned, they will leave the property without paying their last month.
The purpose of a security deposit is not to cover your tenant’s last month. Landowners consider this as an additional type of ‘protection.’

THE DIFFERENCE BETWEEN A SECURITY DEPOSIT AND A RENT ADVANCE

The way these two payments are used differs significantly from one another. When it comes to tax season, the two are also considered different. A prepayment for a rental is regarded as income and needs to be declared the same year it is received. On the other hand, your renter’s security deposit is kept separate unless you hold all or part of it to compensate for the cost of maintenance and any damages. Security deposit laws can be very serious and strict; therefore, keeping rent and deposits apart is advisable per Seattle area rental laws.

ADVANCE PAYMENT RISKS

Below are a few things to consider if a renter requests that they pay in advance.

INCREASE IN RENT

You should think twice about accepting prepaid rent if you have plans to remodel or improve your rental home. Hence, allowing them to pay in advance could lose your opportunity on a monthly rise while your tenant could receive a lower rent deal.

VIOLATIONS OF RENTAL AGREEMENTS

Suppose you decide to evict a tenant who has paid their rent in advance because they have broken the lease or violated it. In that case, you must return the money for the time that was not used, and this could put you in a difficult situation as a property owner in terms of your taxes.

A photo that shows a rental agreement.

IMPACT ON TAXABLE INCOME

Advance rental payments are all taxable income. As a result, rather than paying taxes during the lease period, you will pay them in advance. For example, if a renter makes a December rent payment for January through June, the advance payment should be claimed during the year it was paid.

ACCOUNTING/BOOKKEEPING

Keeping up with prepayments made by one or two renters is not too difficult. However, it is easy to overlook important details in your records when managing multiple properties.

FUTURE GOALS

When you accept a prepayment, the lease term is extended for the installment period, putting any intentions you may have had to renovate and market your home on hold.

WHEN SHOULD YOU THINK ABOUT PREPAYMENT?

Here are the common reasons for accepting a prepayment:

To make the rent-collecting procedure easier;
If your renter has no prior rental history – no prior rental history or is unable to obtain a recommendation from previous landlords, it is good to consider requesting an upfront payment from them to ensure that they will be able to meet the obligations of paying rent;
To protect rent payments if the renter cannot show proof of employment or income;
To secure rental income while avoiding the headache of collecting rent;
To find tenants committed to reserving a rental that is brand-new to the market or in high demand;
Receiving a lump sum of money can help landlords with their cash flow issues, possibly making it simpler for them to compensate for property management services, repairs and maintenance, and other costs in advance;
When dealing with a high-risk renter, such as one who has not given you income documentation, has lost their job, or lacks provable rental history, collecting rent in advance may give you more protection; and
A renter prepared to pay for several months in advance is probably sincere about their intent to occupy the space.

At some point, owners will encounter renters who wish to pay in advance. One aspect of real estate investing worth thinking about as you expand your portfolio is advanced rental payments. Rent collection in advance carries some risks and drawbacks; thus, many landlords opt not to do it. If you accept advance rent payments, abide by local regulations and include information about the upfront payments in your lease. Also, it would be best to exercise extra caution when screening renters who make such requests to ensure they have a reliable rental history and sufficient money to cover regular, on-time payments and other fees related to maintaining the property.

WHY MAY A TENANT CONSIDER PAYING IN ADVANCE?

Your occupant may hope to benefit from rental discounts.
They may have temporary or contract basis employment.
Your tenant may know they require a little assistance managing their finances.

OTHER WAYS TO GUARANTEE RENT PAYMENT

Co-Signers – You can ask a parent or other family member to co-sign if your tenant is young and needs more rental experience to guarantee that the rent will be paid if they run out of money. This is standard practice for young tenants renting their first apartment or sharing a home with roommates. If the renter fails on the lease, the co-signers—typically parents or relatives—take on financial responsibility for the rent.
Rent Guarantor Services – Rent guarantor services act as co-signers for tenants who do not have anyone to co-sign with. To guarantee that the guarantor will cover the rent in the event of their inability to do so, tenants pay a fee for these services.
Insurance for Rent Guarantee – A service that protects landlords’ rental income if a tenant cannot make payments. This kind of insurance can help landlords financially when seeking an eviction because it can pay up to six months’ worth of unpaid rent in a year.

A picture of someone paying online.

It’s unlikely that many tenants will ask to pay their rent in advance because most landlords and tenants prefer month-to-month payments. Various payment options allow tenants to select the one that best suits their needs, such as online payments. This can be highly useful for both sides.

Finally, there is no simple answer: each landlord’s and tenant’s situation is unique, which Davis Property Management understands. We acknowledge not every case will yield the same response; thus, we commit to finding the best solution with a timely and cost-effective approach using common sense problem-solving. Call us now at 425-658-7471 or send us an email at info@davispropertymanagement.com.

For basic tenant laws, please watch video below: