‘Should I Allow Prepaid Rent?’ Property Management Insight

Prepaid rent can feel like a windfall of sudden cash. When a renter or potential resident offers to prepay the rent several months ahead, why wouldn’t you take the money and celebrate having such a good renter?

We hate to be the bearer of bad news, but letting a resident prepay the rent might not always be a wise idea. As a professional property management company, we’ve seen that accepting prepaid rent isn’t always the sign of a good renter. In many cases, property investors lose money and allow a bad renter to move into a rental when they allow advanced rental payments. 

It’s essential to make it easy for renters to pay the rent—but is it ever a good idea to let a renter prepay? Here’s what to consider before you accept the cash to cover several months’ worth of rent!

Close-up view of businessman holding dollar banknotes in handsWhile this article isn’t meant as a substitute for legal advice, investors can keep these tips in mind when considering prepaid rent. Consult your attorney and use this insight from the Utah professionals at Reeder Asset Management! 

It Might Be Too Good to Be True

When your real estate investment cash flow suffers, any offer or prepaid rent can seem like an answer to cash flow woes. However, without doing enough research, you could put your Utah rental property and income at risk.

Know Who You’re Dealing With

A long-term renter who always pays the rent on time and never causes any problems is probably someone you can trust with rent prepayment. You vetted them through your tenant screening process, and they’ve proven themselves to be an excellent resident so far.

Sometimes accepting prepaid rent helps continue a positive working relationship with one of your best renters. If they plan to travel away from their rental home for several weeks (or months), prepaying the rent helps them stay current and follow the lease rules while they’re away.

If you trust the renter and know they’ll return and pick up with monthly rental payments after the prepaid months end, it makes sense to accept rent in advance.

Be Wary of Unsolicited Offers

What about renters you don’t know well? If an applicant offers prepaid rent, real estate investors should be wary of accepting it.

  • ‘Professional Tenants’ often wave the offer of cash to try and win their way into rental properties.
  • As an experienced property management company, we’ve seen it plenty of times.
  • Their applications portray them as worthy potential residents.
  • They hope that offering to pay several months in advance sways you to place them in your property.

However, sometimes with that offer of cash comes a reluctance to follow your standard tenant screening process. Accepting prepaid rent from a renter you haven’t screened and don’t know could put your rental property and future rental income in jeopardy—even if you let them move after paying a few months in advance. 

Girl sitting in cardboard boxStick to Your Screening Process

The best way to protect your properties and income from bad renters is to stick to your tenant screening process—especially for applicants who try to distract with a pile of cash to prepay the rent. A thorough background check will reveal any red flags that should warn you against accepting prepaid rent from a new resident.

  • If an applicant refuses to allow your tenant screening process while offering rental payments in advance, it’s probably not a good idea to accept the money or allow them to move in.
  • They could be hiding a concerning rental history or lack of verifiable income and employment. Offering unexplainable funds to cover several rental payments could indicate illegal income-generating activities.
  • Real estate investors shouldn’t open the door to renters who move in and conduct criminal activities in their properties.

When reviewing a renter’s history, watch out for red flags that should warn you away from accepting prepaid rent, including:

  • No job or verifiable income
  • History of evictions or defaults
  • A low credit score
  • Fake references.

There’s not enough prepaid rent to make up for bad renters moving into your property, then never paying the rent again—or destroying your rental. Property owners could also be liable for criminal activities in a property that harms neighbors or creates problems in the neighborhood. 

While specific circumstances can justify letting a renter prepay, make sure you examine every aspect of the offer and proceed with caution. Never put your properties or future income at risk for a short-term influx of cash from prepaid rent.

Seek Insight From a Property Manager

  • Use your available resources to determine if it’s a smart idea to let a renter prepay the rent.
  • Talk with your accounting department to make sure you can attribute prepaid rent across several months and accurately track it for your renter.
  • The right property management company can also help you screen potential renters to look for red flags, then monitor your monthly expenses when applying a prepaid rent amount over several months. 

Reeder Asset Management helps investors make smart decisions when handling rental payments and renters! Learn more about how we can help you successfully grow your portfolio when you download our free guide to real estate investing.

Posted by:
Reeder Asset Management on January 21, 2021