It sounds like a dream come true: You have secured a new renter that 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 rental 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 company, you'll be able to avoid making this potential mistake—and ensure you are handling tenant screening 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?
Sometimes renters want to pay up front for good reasons. For example, they may want to pay for the first six months of the lease because they have difficulty managing their finances on a month-to-month basis.
This brings us to another consideration: Whether your applicant has stable employment. If someone is willing to pay for your Baltimore rental homes for half a year or more, you may be willing to let typical red flags slide when it comes to completing a full background and employment check.
What if the prospective renter does not have employment but is willing to give you 12 months of rent today? In this situation, consider a few risks:
- After 12 months, they may not have the means to pay rent to you.
- They may leave you with damage beyond the security deposit that you have no way to recoup.
- You may find it hard to deal with the renter for the full 12 months—even if they already paid their rent.
If your resident departs early, having to return some of the rent they already paid can create some considerable tax snarls as well.
How Can You Address This Safely?
What could you do in this situation? One option would be to split the amount being paid.
For example, let's say they want to give you 12 months of rent. Instead, propose that they pay for eight months of rent and four months acts as a security deposit. At the end of the eight months, you revisit the lease and make a determination based on employment, income, and other renter qualifications if you want to extend a lease to the renter. That way, if there is damage after eight months, you have significant funds to work with for repairs.
There are many reasons why someone may want to prepay.
- They may move into an area without employment but are trying to find work.
- They may be in the area for only a limited amount of time.
Sometimes, companies provide a severance check to employees as they leave, which can offer a nice lump of money to cover rental costs during the search for new employment. It's often worth asking them why they want to prepay. Just phrase your questions carefully or work with Maryland property management if you need guidance.
It's up to You to Determine if Prepaid Rent Is the Right Fit
If you are considering any type of prepayment like this, 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 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.
Verify Details With Your Accountant
- 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
- In most situations, you don't want to agree to terms in which your renter is able to simply walk away without paying for any damages they've done to the property. Set up a method to allow you to have some recourse should they leave behind a problem for you.
- You should ensure your lease protects you by including specific terms for how a renewal will work under a modified rent system. That may include an increase in rent in some cases.
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 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.