Real estate investing comes with a considerable number of common challenges. These dilemmas hold whether you've just invested in your first property or whether you have an extensive real estate investment portfolio that you've owned for years.
These are all real estate investment universals, and it generally isn't too hard to find an answer to your questions on these issues!
There are, however, many circumstances that can arise for which you will have no easy answer. It may be that question is just a rare occurrence. It may be a divisive topic, where you can ask many different Carlsbad landlords and never get the same answer. An excellent example of this sort of dilemma is the question of letting a tenant prepay the term of their rent. There are many reasons that a tenant may want to do this; there are just as many reasons why a landlord may choose to accept or refuse the offer. Ultimately the decision is up to you and what you think your real estate portfolio and accounting can handle. However, most property managers will tell you that accepting rent upfront should be answered with a resounding "YES!"
A tenant may wish to prepay rent for a couple of innocuous reasons. Carlsbad (as with much of North San Diego County) can be a tight rental market, so a tenant may be offering to pay a large amount of rent upfront to stand out from other renters and secure the property. Prepayment may be something that you offer to a potential tenant, or the suggestion may come from them. Either way, be sure to do your usual due diligence when screening these tenants. If they pass your screening process with flying colors and their money is good, then it's a dream come true!
A tenant may also offer to prepay rent to secure a lower rate. In some respects, paying (and accepting) rent upfront represents a risk for both landlord and tenant. The tenant is assuming that the housing situation will remain stable (you won't decide to sell the property, or a natural disaster won't strike), and you are assuming that you won't need to adjust rental rates or incur any unexpected expenses. In general, you come out ahead in this sort of situation (you're getting guaranteed rent for an extended period). If your long-term plans with the property in question can accommodate the discount—or you're trying to keep a good tenant a little longer—this can be the right decision for your real estate investment portfolio. However, if you have plans to sell your property at any time, you need to let the potential tenant know in advance.
Remember, too, that in many cases, tenants may offer to pay upfront for more personal reasons. They may feel that they don't manage money very well and want to cut out the hassle of monthly budgeting. They may be in a transition of some type. Maybe they've just graduated from school or are in between otherwise well-paying jobs. If they meet your screening criteria and can meet your rent requirements, it can make little difference whether they pay that money in a lump sum or installments. Follow your screening procedures and trust your instincts.
Paying for a year of rent upfront has often been considered the sole domain of a renter with abysmal credit or someone moving to the Carlsbad area with no established credit history at all. Lean on your screening process to determine whether an applicant is a good fit or not; this process should allow you to make good tenant choices. Even for tenants with poor credit, the ability to pay their entire year in advance is is an advantage to you! However, you should always request the payment in secured funds, such as a cashier's check or money order. This way, you can be sure you receive what is due—without bounced checks.
You might be asking yourself: "What if I need to evict a tenant?"
The good news here is that accepting rent upfront eliminates the number one reason you would ever need to evict a tenant! The important thing is to set the right expectations from the start. If you do this, needing to evict your tenant will not be an issue: they are breaking the lease they signed when they tendered payment. Document any infractions correctly, and you should have no issues if you need to go to court. However, be aware that your lease must be clear on what could cause an eviction. When in doubt, consult with competent legal counsel to draft an air-tight lease.
In many cases, accepting an upfront payment can limit your flexibility—especially if you are renting month to month. You may want the leeway to adjust your rental rates. Taking a lump-sum payment means that you lock yourself into that rate for a certain period of time. Perhaps you are planning on selling the unit or terminating an ongoing month-to-month lease in the relatively near future. If you accept a lump-sum payment, you are locking yourself into a de facto lease with those tenants for the amount of time covered by the upfront payment.
Finally, it may not make economic sense to accept upfront payments. This type of payment scheme can add additional bookkeeping work to your already busy schedule! In many cases, state and local laws can mean that you need to handle this type of payment differently than more traditional monthly rent payments. It can be a natural choice to say that the juice is not worth the squeeze. If you decide to work with a property manager, the game changes: a property management partner will handle a great deal of the paperwork for you.
Finances, accounting, and real estate law can have you pulling your hair out in frustration. Maybe you've turned away perfectly good tenants because you've decided that a blanket "no upfront payment" policy is the most comfortable choice. Don't shy away from this complex topic! If you want to widen the scope of your potential tenants and handle this sort of unexpected payment request, reach out to Raintree Property Management. As an expert, Carlsbad area property management company, fielding your financial questions is our business! We can handle everything from tenant screening to rent collection, so you don't need to worry about these issues while you work with us. Reach out to us today online or by phone and put our considerable expertise to work for your investment!