It sounds like a dream come true: You have secured a new renter who wants to prepay their rent for six months, a year, or even longer. That may sound like a good thing because you will not have to chase after rent payments for your Baltimore rental homes.
However, it often comes with risks—most of which you may not suspect right away. When you work with a Maryland property management business, you'll be able to avoid making this potential mistake—and ensure you are handling tenant screening process properly.
However, if you're set on managing your Baltimore homes for rent alone, here are some tips from the experts here at Renters Warehouse that we recommend you consider.
Keep in mind that this information is not legal counsel. We highly encourage you to work with an experienced attorney if you’re not handling this process via full-service property management.
What Could Go Wrong With Prepaid Rent?
Prepaid rent might seem appealing at first, especially when a prospective tenant offers to pay several months in advance. For example, a tenant might want to prepay six months of rent because they struggle to manage finances on a month-to-month basis. While their offer may sound like a solution, it’s important to consider the potential risks.
One key consideration is the applicant’s financial stability. Does your prospective tenant have stable employment? If someone is willing to prepay rent for six months or more, you might be tempted to overlook traditional red flags in their background or employment history. However, this approach can lead to problems down the road.
What if a prospective tenant offers to pay 12 months of rent upfront but doesn’t have stable employment? Here are a few risks to consider:
- After 12 months, they may not have the means to pay rent to you.
- They may leave you with damage that exceeds the security deposit, leaving you with no way to recoup your losses.
- You may find it hard to deal with the renter for the full 12 months—even if they already paid their rent.
Another challenge arises if your tenant leaves early. Refunding part of their prepaid rent can lead to significant tax and accounting complications, which may be difficult to navigate without professional guidance.
How Can You Address This Safely?
One option is to split the prepaid amount into different purposes.
For instance, if the tenant wants to pay 12 months of rent upfront, you could propose they pay for eight months as rent and allocate the remaining four months as a security deposit. After the initial eight months, you can reassess their lease based on their employment status, income, and overall qualifications to decide whether to extend the lease. This approach also provides additional funds to cover maintenance and repairs if there’s any damage after the eight months.
There are several reasons why someone might want to prepay rent. For example:
- They may have moved to the area without securing employment but are actively seeking work.
- They might only plan to stay in the area for a limited time.
- Sometimes, severance packages provide a lump sum that tenants use to prepay rent while they search for new opportunities.
It’s a good idea to ask prospective tenants why they want to prepay rent, but approach the conversation thoughtfully. If you’re unsure how to handle the situation, consider consulting Maryland property management professionals for guidance.
It's up to You to Determine if Prepaid Rent Is the Right Fit
If you are considering prepaid rent, here's what we would suggest you evaluate first.
You May Need to Create a Custom Lease
You need to know what you expect and need from your renters, especially if you're considering a non-standard leasing term. A typical lease requires you to outline how much is being paid in rent, the security deposit requirements, and the terms for evicting a renter. Make sure to follow the law for each step, even with a custom lease. If you need assistance, you can always turn to the experts here at Renters Warehouse for guidance on writing a leasing agreement.
Ensure that your future renter still meets your terms and requirements for things like:
- Credit qualifications
- Employment verification
- Personal reference requirements
- Criminal history checks.
By clearly defining your expectations and conducting thorough checks, you can ensure that your rental property is in the hands of reliable tenants who align with your leasing terms.
Verify Details With Your Accountant
Setting up a solid financial system for rental prepayments requires careful planning to ensure compliance with financial regulations and protect your investments.
- If you are going to establish a system that allows for prepayment, it is best to meet with your accountant or another financial advisor.
- Get insight into how to minimize risks associated with both liability and accounting management.
- You will need to track and manage those funds properly to ensure that, if there is a need to, you can refund the renter at a later time.
If you're working with Maryland property management services to help manage your finances, you'll want to discuss this concern with them as well since it may affect the reporting they deliver.
You'll Still Need a Security Deposit
Even if your tenant pre-pays rent, it’s important to have a security deposit in place. This ensures you have recourse if the tenant causes damage to the property or leaves behind issues that require repairs. Without a security deposit, you may be left covering these costs out of pocket.
To protect yourself, make sure your lease includes clear terms regarding how a renewal will work under a modified rent system. For example, specify whether rent increases may apply upon renewal and outline the conditions for extending the lease. These provisions provide clarity for both you and the tenant, ensuring a smoother rental process.
Renters Warehouse Can Help!
If this is starting to seem like more trouble than it's worth, we can help you navigate the complexities of prepaid rent. As your Maryland rental property management company, we'll work with you to ensure you have the right renter—and we'll help refine your lease to protect your rights as a property owner.
However, this is not the only way that we serve Baltimore investors! Learn more about how to securely invest in real estate in our area when you download our free guide to real estate investing.
