Accepting prepaid rent can be excellent for your cash flow—but terrible for business if you fail to handle it with care. When a renter (or potential renter) offers to pay several months of rent in advance, investors should proceed with caution before accepting the influx of cash.
Should investors ever let a renter prepay? As a D.C. property management professional with experience serving the many communities that call D.C. home, we've heard that question often. Paying the rent on time every month is an important rule to enforce with renters—especially if your rental homes are located within associations that require on-time dues. However, accepting offers of prepaid rent can create challenging situations for you as the investor if not handled properly.
Before you allow payment in advance, first read these insights gained from our experience as community association management experts.
Please note: This post is not a substitute for proper legal counsel and contains current information at the time of its publishing. When in doubt, it's best to reach out to the professionals at EJF Real Estate Services or obtain guidance from a skilled attorney.
Prepayment Should Be Handled Safely
A long-time resident that always pays the rent on time, takes excellent care of your Washington D.C. homes for rent, and never causes any problems can probably be trusted with prepaying the rent. You know they aren't trying to get out of rental payments later in the lease because they've built a history of reliable rental payments and always following the rules.
When you know and trust your renter (and have screened them thoroughly), accepting rental prepayment can help further a positive working relationship with your residents. Letting renters prepay makes sense when:
- They plan to travel for a few months and want to avoid missing a payment
- Their cash flow fluctuates, and paying ahead helps them stay current
- They're dealing with a job relocation and will come and go from your rental before the lease ends.
If prepaid rent helps a resident, it can help you, too. You know a trustworthy traveling renter will return and pick up with monthly payments where they left off through the prepaid amount. Having their cash in hand can help improve your cash flow while they're free to travel without worrying about the rent.
- Make sure to put the prepayment details in writing and attribute the total sum with appropriate monthly installments.
- Give your renter credit for every month paid in advance, and be aware of when they should resume monthly payments to stay current.
- In our role as community association management professionals, we help track expenses and budgets for those we serve.
- If you need assistance, we can help you track prepaid rent and manage monthly expenses accordingly, too.
The Negative Aspects of Prepayment
The offer for several months of rental income can be appealing—but you should exercise caution when the offer comes from an applicant you have yet to screen. Prepaying the rent should never be a substitute for following the lease rules or skipping your screening process. If a potential renter teases rent money for several months and asks to forego the background check, walk away from the cash—and the renter.
Your rental criteria should always include the requirement of a background and credit check. Any applicant who refuses it or tries to get around it should automatically fail your resident criteria. No amount of prepaid rent is worth placing a renter without screening them, then suffering the consequences of property damage, criminal activities, or other difficult renter problems taking place in your property.
As a community association management expert, we have seen this cause problems for investors on two fronts: within their property and within the community. You won't want to be the one who gets hit with the penalties for the actions of your residents.
When Washington D.C. investors risk accepting prepaid rent from an unverified applicant or less-than-trustworthy resident, you could deal with:
- A renter who pays three months ahead—then never pays again
- A 'Professional Tenant' that looks good on paper and walks in with cash then destroys your property and won't leave despite your requests
- Unverified income from illegal activities that now take place in your rental.
Before saying 'yes' to prepaid rent, do your research and trust your instincts. If it doesn't feel right, there's no need to allow a renter to prepay with a signed lease in place and clearly-outlined rental payment rules.
Trust the Screening Process
A thorough screening reveals critical information about a potential renter. Be careful how you screen and use the information a background check uncovers. However, if you can't verify employment or income and an applicant has a prior history of defaults or evictions, it might be best to avoid placing that renter in your property—even if they offer to prepay the rent.
Consult Your Accountant
Even if all signs point to a trustworthy renter with a reliable offer to prepay the rent, consult your accounting partner. An influx of cash flow might seem like a good idea. However, depending on the timing and your tax situation, prepaid rent could affect your deductions and tax payout for the calendar year.
We Can Help Handle Renter Payments
Whether it makes sense to let a renter prepay or you prefer monthly rent collection, working with exceptional D.C. property management services makes your role as the property owner far simpler.
Our screening process helps us evaluate a situation when a resident (or potential renter) offers rental prepayment. If it's not a good idea for your cash flow or it puts your investment income and properties at risk, we maintain business-as-usual with on-time monthly rental payments according to the lease.
The debate concerning prepaid rent is just one of the many facets of investing that property owners need to be aware of. If you'd like to learn more about how to invest successfully in the D.C. area, download your free copy of our guide to real estate investing!