Imagine this scenario: you recently put a Daytona rental property on the market. You have shown it to a few prospective tenants and had positive reviews and a few applications coming in. You're reviewing all of the applicants for the most qualified candidate, and one of the applicants comes to you with an offer: he would like to pay the entire year's rent upfront—and he could sign a lease as soon as tomorrow.
The question is, do you accept?
Here are some reasons why accepting prepaid rent is fantastic:
- You have a full year of rent upfront!
- You will not have to make late rent collection calls for at least a year.
- If the tenant breaks the lease, you won't have to collect the remainder.
However, there are far more reasons why prepaid rent might not be as fantastic as it may seem.
- Prepaid rent could mean the tenant is bad with budgeting—which could spell trouble after the prepaid amount runs out.
- The tenant may not be legally acquiring the funds: prepayment might be a way to avoid proving their source of income.
- In some states (not Florida), you cannot accept specific amounts (check with your lawyer).
- Bulk payments could affect your taxes (see your accountant).
- If the tenant legally breaks their lease, you will owe the extra funds back.
Why Would a Tenant Offer Months of Rent in Advance?
There are many reasons why a potential tenant might offer prepaid rent—and not all of them are nefarious!
- Sometimes tenants offer rent upfront because they have poor credit and are trying to get a landlord to give them a chance.
- Your potential tenant may even be a lottery winner, but beware: 70% of lottery winners go broke.
- With enough savings, a renter between jobs might offer additional rent to try to make themselves more attractive.
- A renter may be moving from another state for work and is using their relocation money for rent.
Addressing the Question of Whether or Not to Accept Prepaid Rent
Some Daytona landlords think of prepaid rent as a "bribe," some think of it as a blessing. Ultimately, we believe it should not be the deciding factor for whether you rent a property to an individual or not, and here is why: a predetermined set of screening factors should always be the ultimate decider when choosing tenants.
When you become a Daytona landlord, it is essential to build a set of screening criteria—and stick to them. By applying these standards equally to applicants (and documenting it), you can ensure you are meeting the Fair Housing Act (FHA) criteria.
The Fair Housing Act ensures that landlords don't discriminate against tenants based on their:
- National Origin
- Familial Status
When you use predetermined criteria and apply it equally, you are protecting yourself from claims of discrimination. If you require all tenants to be able to prove income and creditworthiness, that should also apply to your tenant who would pay in advance. If you require tenants to have a verified source of income, then your prepaying tenant should, as well.
Considerations When Choosing to Allow a Tenant to Prepay
If you choose to allow a tenant to prepay, you should equip yourself with sufficient data to ensure that you are renting to a tenant who will not only pay the rent but also treat your Daytona investment property with respect and care.
Adequately background screening your tenant will provide you most of the information you need to feel confident that your investment is in good hands. Some red flags to look out for:
- A history of evictions
- Criminal judgments involving damage of property
If the tenant who is asking to prepay meets your criteria, then congratulations! You may have hit the jackpot and found a tenant who is going to help your cash flow!
Even if they don't, the temptation might be there to say yes. If you do, be sure to have an iron-clad lease and be prepared for all scenarios. You may consider requiring a larger security deposit on a shorter length lease to give yourself the opportunity to try out the arrangement with less risk.
Working with a professional property management company in Daytona can make these decisions more comfortable. Give us a call: Verandah Properties has been serving Daytona landlords for 16 years. We are experts at helping our clients navigate these difficult situations. As an additional benefit, if things go wrong, you can count on us to help you sort it out.
If you are interested in growing your Daytona investment portfolio, you can download our free guide, "Real Estate Investing: Grow Your Portfolio." This guide covers some of the tips you'll need to go from one property to many! Just click this link to get started building long-term wealth.