In the last chapter, we covered the basics of rent collection. Now that you have the basics covered, you’re ready to start collecting rent.
In this chapter, we’ll go over best practices for collecting first month’s rent, including prorating rent if you need to.
When Should You Collect First Month’s Rent?
Here’s the correct order of steps to follow:
Let’s go over why this order is important. First, you shouldn’t collect rent payments or security deposits until after the lease is signed. Signing the lease is what makes your agreement with your tenant official. There shouldn’t be any exchange of money until everyone has agreed to the lease terms. On this note, it’s important that tenants sign the lease first.
Next, you should only provide keys to your tenant once he or she has handed over the correct payment and deposit, and the payments have cleared. That way, if your tenant doesn’t hand over first month’s rent, it is still easy for you to cancel the lease. It’s much easier to cancel a lease before a tenant moves in, compared to evicting a tenant after he or she has taken possession of the property.
Check out our 7 tips for collecting security deposits and first month’s rent.
Collect Separate Payments For Rent and Security Deposits
It’s important to collect separate payments for first month’s rent and the security deposit because you may need to handle security deposits differently than rent payments.
For instance, some cities or states have rules stating that you must keep rent and the deposit separated. In that case, deposits must be held in a separate, interest-bearing bank account. If you live in a city or state where this is the law, then tenants can sue you if you mistakenly commingle rent and the deposit. Tenants can often sue you for three times the deposit amount, which is a very costly problem to deal with.
You should also provide separate receipts. This helps you keep track of what was paid. Some cities require that you provide a security deposit receipt. Again, the penalty for not providing a receipt, if that’s the law, can be up to three times the deposit amount.
When Should You Prorate Rent?
Prorated rent is applicable when a tenant is moving in or out in the middle of the month. As a landlord, you want your tenant to move in as early as possible to avoid a vacancy. As a result, rent may need to be prorated so the price accurately reflects the number of days the tenant lives in the property.
Here’s the formula for how to prorate rent:
Daily Rent Amount = Monthly Rent Price / Number of Days in that Month
Prorated Rent Amount = Daily Rent Amount * Number of Days Tenant Lives in the Property
Should You Collect Last Month’s Rent Up Front?
Some landlords also collect last month’s rent up front as a security measure. However, we don’t recommend collecting last month’s rent up front. For one, it’s often confusing to tenants to collect it so far in advance. Another reason not to collect last month’s rent is that tenants just can’t afford it. You’ll be cutting down how many tenants you can rent to by making the initial outlay of funds so large, especially when a lot of other landlords are not charging last month’s rent.
It’s important to note that any rent that is prepaid six months in advance is legally considered a deposit in some states. Therefore, if you collect last month’s rent, you need to follow deposit laws by keeping it in a separate account.
To avoid confusion, it’s best to collect first month’s rent, and a security deposit or move-in fee. If you’re more comfortable collecting first month’s rent, a security deposit, and last month’s rent, then be sure to follow deposit laws on that payment, if your state requires it.
Next Steps
Once you’ve collected first month’s rent, everything should be smooth sailing from there. The only bump in the road would be if your tenant starts paying rent late.
In the next chapter, we’ll delve into late fees and grace periods. That way, you can set up your rules in a way that helps you avoid late rent before it occurs.
Originally published at Rentalutions.
