Published January 28, 2021
Updated April 27, 2023
Please note: This article is not legal advice. For up-to-date information and guidance, reach out to your attorney or Real Property Associates.
It is not uncommon for investors to encounter renters at some point in their career as property owners who want to pay for their homes for rent in Seattle in advance.
If a renter requests that they pay upfront, there are a few things you and your Seattle property management company need to be aware of before you accept. Keep reading to learn why some renters want to pay several months in advance and what property owners should know before accepting prepaid rent.
Why Renters Want to Prepay
There could be a number of reasons for renters requesting to get ahead on rental payments, some of which are not always red flags:
Your resident may want to take advantage of rental discounts
They may have seasonal employment or contractual employment that takes them to another location for a few months
Your renter may understand they need a little help keeping track of finances. Prepaying rent helps them prioritize that bill every month.
However, even with purely honest reasons for wanting to pay more than one month's rent at a time, property owners should understand the impacts of collecting more rent than necessary upfront.
Understanding Rental Prepayments
A rent prepayment is a rental payment a renter makes for future use of your property, excluding rent paid for the month following the payment. For instance, if a renter signed their lease in January and paid for six months' rent, the first month will be the standard rent payment, while the rest is a prepayment for an additional five months in the property.
However, a security deposit isn't designed to cover your renter's last month in your property. It's also not a "prepayment" of rent.
Many property owners may consider this as an additional form of 'insurance.' However, as a Seattle property management company, we caution you to consider how security deposits operate under rental law.
How Is Rent Prepayment Different From a Security Deposit?
The significant difference between these two payments is how each is used.
A prepayment only covers the rent, which means that you cannot use it to repair any damages the renter causes to the property.
On the other hand, you can use a security deposit to cover the cost of maintenance and repairs beyond typical wear and tear.
Security deposit law can be quite serious and strict: it's best to keep rent collection and deposits separate according to current rental laws in the Seattle area.
The two payment types are also treated differently regarding tax time. A rental prepayment is considered income and must be reported within the year received. However, your renter's security deposit is kept separate unless you keep all or some of it to pay for any damages.
Additionally, repairs are tax-deductible (up to a certain amount) for rental property owners.
When Should You Accept Rent Prepayment?
Some of the most common reasons why you may want to consider allow a tenant to pay rent in advance are:
To ease the rent collection process: If you have not partnered with a Seattle property management company, you may want to ease the rent collection process by asking for upfront rent payments. That said, you'll need to work with an excellent accountant to keep track of things if you choose this method.
If your renter has no rental history: If a renter has no rental history or you cannot get a recommendation from former residences, asking them for an upfront payment could be a way of ensuring that they can meet the demands of paying rent if they otherwise pass your screening process.
If you're not sure that accepting rent in advance is a good idea with a new tenant, a property manager can help you make the best decision for the lease term.
The Risks of Prepayment
While it can be okay in some situations to accept prepaid rent from a trusted renter, it's important to understand the risks that may come with such an arrangement.
You Cannot Increase the Rent
When you agree to a rental prepayment, you are forfeiting your right to increase rent for the prepaid timeframe. This would primarily apply to a month-to-month lease situation where there is more flexibility to adjust the rental amount vs. a fixed-term lease.
If a renter who has prepaid their rent breaks or violates the lease agreement, you must refund the monies for the unutilized period if you choose to evict them. This can create some complicated situations for you as a property owner when it comes to your taxes and cash flow.
It Affects Your Taxable Income
All advance rental payments are considered taxable income. As such, you will pay taxes in advance rather than during the lease period.
For example, if a renter makes a rent payment for January through June in December, the advance rent paid should be claimed as rental income during the year it is paid.
Accounting and Bookkeeping
It can create additional work to keep up with prepayments made by one or two renters. When handling multiple properties in a portfolio without the help of a reputable Seattle property management company, it is easy to miss marking things down perfectly in your own records.
It Interferes With Any Property Resale Plans
Accepting a prepayment means that you have extended the lease term for the duration of the payments. If you had plans to renovate and sell your property, this effectively puts them on hold.
If a potential renter passes the screening process, talk with your Seattle property management partner about the benefits of prepaid rent. For some residents, this could be just what they need to balance their finances.
That said, there are also alternatives to early payments. Young renters or those without a renter history could opt for a co-signer or a guarantor. This person is responsible for paying rent if the renter defaults.
You could also consider taking up rent guarantee insurance instead of rent prepayment. Such a policy will protect you against lost income if a renter defaults or falls behind on their rent payments.
Seattle Property Managers Handle Various Rent Collection Situations
Advanced rental payments are just one facet of real estate investments you may run into when growing your portfolio in the Seattle area! If you're not sure about a specific situation or you're ready for experts to handle all rent collection for your property, reach out to the Real Property Associates team to learn how we can help.
To learn more about building a successful real estate portfolio, download your free copy of "Real Estate Investing: Grow Your Portfolio!"