Reasons to collect rent in advance
These are some of the more common reasons a landlord should consider advance rent payments:
1. Safeguard rent payments: When a resident is unemployed or can not offer evidence of income, paying a rent up front for several months (or more) would guarantee that the landlord gets paid.
2. Save the hassle of raising rent: Many landlords give discounts to tenants who pay rent in advance. This way, payments are covered and no landlord has to worry about collecting rent.
3. Protect a property: If the property is new to the market or has several applicants, landlords can ask tenants if they will be willing to pay rent to contract the property in advance. In this way, renters can avoid losing a place they want and landlords can find the renters who are serious about staying on the property while ensuring rental income.
3. Lack of rental history: If a tenant does not have a rental history (as is often the case for college students moving out for the first time on their own), some landlords may demand an upfront payment to ensure rent is protected.
Risks of collecting Rent in advance
There are a number of fairly reasonable reasons to let a tenant pay in advance, but know the risks and conditions that come with this practice:
1. Violations of the lease: If a tenant violates or breaches the lease, and yet they have already paid the rent in full, you will have to pay back the balance of the rent left from the prepaid part.
2. No rent increases: You won't be able to raise the rent within the deferred time period if they pay the rent in advance.
3. Laws on prepaid rent and security deposit: Each state has security deposit laws, and some states can only require a landlord to receive rent for the first and last month, plus a security deposit — and nothing else. Many Member States treat deferred rent as a security deposit, subject to the same rules, legislation and interest payments. Before you agree to take any rent payments in advance, make sure you know the rules of your State.
3. Extra bookkeeping and accountability: Some states that only require you to pay rent in advance if it is deposited into a trust or escrow account, and transferred to the landlord's account only when the monthly rent is due.
5. Taxable Income: Prepaid rent is taxable income. Landlords pay taxes on the advance rent the year it is collected and not even during the time span of the lease. For example, if a tenant pays rent from January to June in December that covers tenancy, the advance rent paid in December must be reported for that year and not the year during the tenancy.