Buying rental property has long been a mainstay for investors looking for a steady return. When you buy wisely and keep it maintained, you can add substantially to your portfolio.
But how do you finance rental property? The simplest and fastest solution is to pay cash. But it’s seldom the case that people can afford that, especially when they are just starting out.
Getting a conventional mortgage for rental property can also hit snags. This is definitely true when the home you want to buy is in poor condition. Banks are hesitant to let them qualify for certain types of financing.
Thankfully, there are several ways to finance your investment property. Here is a look at a few of your options.
Conventional financing means using the property you want to buy as collateral for the loan. You can get mortgages that last 15 to 30 years, all for a monthly payment that stays the same. With this method, you are usually required to come up with 20% to 30% for the down payment.
It sounds good, but as always, the devil is in the details. For example, many banks require that you can afford the mortgage on your rental house and on the house you are living in, without including future rental income in your loan calculations. You also can’t use it when figuring your debt-to-income ratio.
These are popular ways to finance rental property because most lenders let you borrow up to 90% on your primary residence and 80% on a vacation home.
With a home equity loan, you get the entire amount when you qualify. Like a mortgage, you pay a fixed amount each month for 15 or 20 years, which covers both principal and interest. In effect, this is the light version of the conventional mortgage.
A related method is called a Home Equity Line of Credit, or HELOC, and it works much like a credit card. You are able to charge or borrow funds from your line of credit as you need it. You get a bill once a month. As a rule, the minimum payment is the interest.
This can be done two ways, on a primary or vacation home. It can also be done on a piece of investment property that you currently own.
Your primary residence or your vacation home is used as security for the loan. The process is just like a regular mortgage, and it takes about a month and a half to get your funds. As a rule, lenders let you borrow up to 80% of your home’s value. The outstanding amount on the original mortgage is first paid, then you get the rest of the funds, the “cash-out.”
If you already own a rental property, you can get a maximum of 75% of its value, as long as you bought it longer ago than six months. This is the standard amount for a one-unit property. For one with two to four units, the maximum you can borrow is 70%. If you have four or more properties financed, then the limit it 65%.
There is also a variation called the delayed financing exception. This means that you don’t have to go through the six-month waiting period and the refinance can happen immediately. This is possible if the purchase transaction involved no financing and you are able to meet several requirements. For example, the new mortgage must be less than the initial investment that was used for the purchase and no liens must show up in a title search.
You might be thinking family and friends when you hear the term “private funding.” But the fact is, there are many people who offer private financing secured by a home. One big advantage is that it is usually faster than the process of getting a standard mortgage from a bank.
You will most likely end up paying a higher interest rate, but it is often worth it. Consider that if your property has a positive cash flow and appreciates, you may need the funding only for a short period. After that, you can get conventional financing on better terms.
A popular type of private funding is called a hard money loan. It is offered by individuals or by small groups who base their decision to lend you money on the value of the property you are buying, not on your credit score.
It doesn’t come cheap. The interest rate can be twice as high as a conventional mortgage and it usually has steep origination fees. You need to back up the loan with real assets. What offsets this for some investors are the facts that you can usually borrow up to 100% of the purchase price and there is little red tape to slow the process down.
Whichever method you use, it makes sense down the road to refinance your rental property with a conventional mortgage with a 15-, 20- or 30-year term. The rates are lower and what you pay is predictable every month, making it easier to manage your investments.
Investing in rental properties can bring a nice return on investment (ROI), especially if you approach it with the proper know-how and strategies. Learning from the mistakes of others is one of the best ways to know how to invest and manage your properties. One question you may have is whether it is best to invest in single family vs. multi family rental properties. Let’s compare these investments.
There are similarities between the two types of investments. Both types of properties:
Single family homes can be a great investment if you do things wisely, therefore some people feel they are a better investment. Here are some pros of renting single family vs multi family homes:
Some purport that multi family homes are a better investment. There is evidence that cash flow is better with these properties, however that may be offset by the quality of tenants and high turnover. Here are some pros of investing in multi family vs single family homes:
Ultimately, both types of properties can be a good investment. It’s important to look at what you have to invest, how involved you want to be in the management and maintenance of the properties, how long you plan to keep the properties, how much you need to finance, and how much money you have stashed for emergencies. Both single family and multi family rental properties can set you up for steady income and early retirement if you invest wisely.
Top 15 Tax Deductions for Landlords
Paying taxes isn’t fun for most business people, but it is a necessary or compulsory part of life. As a landlord, paying your taxes doesn’t have to be a bitter pill to swallow, because federal law allows you to take advantage of a number of tax deductions on your rental income. This article seeks to explore some of the top fifteen tax deductions you could benefit from as a landlord.
Taking advantage of these deductions could make the difference between gaining a sizeable amount of income on your rental property, and losing it. There are some rules every landlord has to follow if they want to take advantage of these deductions, the crucial one being that you can only deduct necessary and ordinary expenses.
An ordinary expense is one that is accepted and common in your industry, such as paying contractors to repair a leaking roof. On the other hand, an expense is deemed necessary if it is appropriate and helpful in your line of business, such as advertising your premises so as to get tenants. It is important to keep proper and detailed records of all your expenses concerning your rental property, so as to make the deduction claim and process seamless. Below is an elaborative list of the deductions you can make as a landlord:
Depreciation of assets refers to the things that you have purchased for business purposes, which depreciate over time and whose use goes beyond the current tax year. There are three major types of costs that you can depreciate, these include:
• The value of the property (not the land, as land appreciates in value over time)
• The cost of any improvements done on the property such as replacing worn out carpets, countertops, roofs, appliances and more.
• Equipment, automobiles, laptops, and computers for business use.
These expenses are not deducted in a single year. They are spread over multiple years.
One of the biggest deductible expense you can make as a landlord is on any interest you accrue because of a loan or any other expense related to the rental property. For instance, if you took out a mortgage or loan on the property, then you can deduct the interest accrued on the loan/mortgage when filling your property’s tax returns. You can also make deductions on the interest accrued on your credit cards as a result of making payments related to improving or repairing the property.
Repairs are a necessary part of owning a rental property, because “things will always break.” Repairs help landlords keep their premises in good working condition, they are, therefore, deductible. Examples of repairs that can be deducted when paying tax include:
• Air Conditioning Repair
• Fixture Repairs
• Incidentals that are related to a repair
• Plumbing Repairs
• Labor Costs and Contractor fees
Both long distance and local travel expenses that are business related are deductible. For instance, if you use an automobile to travel to your premises regularly then the cost of maintaining the vehicle, the cost of gasoline and parking fees are deductible. If you use public transportation then you can deduct these expenses. On the other hand, if you have to travel by air you can deduct the cost of your air tickets.
You can also deduct the amount of fees you pay for professional or legal advice/work. These include real estate agent fees, attorney fees, accountant fees, and the fees you pay other to professional advisors, such as structural engineers.
All insurance premium payments you make towards securing your business premises are tax-deductible, such as:
• Fire/ Liability and Damage Insurance
• Theft Insurance
• General Liability Insurance
• Flood Insurance Riders
• Homeowners Insurance
• Personal Umbrella Insurance
• Mortgage Insurance Premiums
• Workers’ Compensation Insurance
Managing your property can be quite a challenging task. For this reason, most landlords usually hire property managers or on-site manager to assist them: you are allowed to deduct these expenses, as well as those of other employees.
As a landlord, you will sometimes be required to pay fees to tenants or managers for referring potential residents to hire out your premises. The IRS recognizes these commissions as being deductible.
As a landlord, you need somewhere to keep your documents, records and even work. Any commercial space you use concerning your property can be deducted. If you work at your home office, then you can deduct square footage. You should also deduct any other operational expense, such as:
• Pencils, Pens, and Staples
• Ink & Printer Paper
• Legal Forms
• Phone Bills
Some landlords use advertising as a way of getting their property occupied fast. All the different types of advertising costs can be deducted, so whether you use Craigslist, signs, and banners, online ads or newspapers to advertise include these costs in your tax deductions.
Maintenance is not the same as repairs. Unlike when doing repairs, you are not fixing any broken thing or item when doing maintenance. For instance, the lawn has to be regularly maintained by cutting grass, but the lawn does not break. Other types of maintenance costs include:
• Pest control and treatment
• Homeowner Association Fees
• Light Bulbs
• Landscaping and Tree Trimming
• Smoke Detector Batteries
• Pool Maintenance
• Janitorial Items
• HVAC Filters
If you happen to lose rental income because your property has been damaged or destroyed, then you can make a tax deduction on part of or all of your loss. Loses that occur all of a sudden as a result of flooding, fire or some other unfortunate occurrence, are regarded as being casualty losses. You can also deduct items lost as a result of theft.
The costs you incur in services can be deducted when making your rental income tax returns. If your tenants happen to reimburse you for paying a utility expense, you can still make a deduction. You will, however, have to claim the reimbursement made as income. Deductible utility expenses include:
• Water & Sewer
• Trash & Recycling
• Heating Oil
14) Start-up Expenses
A start-up expense is incurred even before a business has commenced. These costs are deductible, but they cannot be deducted in a single year because a start-up expense is still a capital expense (a cost that will benefit you for years and no just one year). $5000 is the maximum startup deduction you can make in the first year.
Because you earn money from your real estate venture, it is regarded as a passive activity, in which losses incurred in this activity are deductible by up to $25,000 (special allowance). However, a landlord must actively participate in the real estate business to qualify for the passive activity loss deduction. For instance, you must be actively involved in management decisions including repair and maintenance decisions. You must also have at least 10% interest in the rental property, to qualify for this deduction.
One of the aspects that make’s the real estate industry quite lucrative is the income you can make from your property. The other lucrative aspect of this industry is the various tax deductions you can claim such as maintenance and repair fees, employee payments, stat up expense and more. It is important to be as accurate as possible when making these deductions to avoid encountering any problems with the IRS. Where possible, keep some form of record such as a receipt for evidence.
Is it worth it getting certified as a property manager? The answer: it depends? While the courses themselves provide a lot of useful information, Landlords and Property Managers are not really the same job.
Landlords actually own property, while property managers are the people who actively manage these properties on behalf of the landlord. For smaller landlords, this may be the same person. Larger businesses and out of state landlords will often employ a property manager.
The property manager’s responsibility will change depending on both jurisdiction and landlord, but usually involves:
This question depends on the jurisdiction, so you’ll need to check both state and local laws. If you’re going to be involved in both the renting/selling on behalf of clients, then you’ll definitely need a real estate license.
Even if you’re jurisdiction doesn’t require specific licensing as a property manager, certification is still important. Below are what are considered the 5 best certifications and licenses for property managers:
Most states require property management companies to have a real estate broker license, especially if the company is involved in collecting rent. If your company has a broker’s license, you may only need a salesperson’s license, as long as you are listed as working under the managing broker.
In states like Maine, Idaho and Vermont, property managers do not need to be licensed. Other states, like South Carolina, Oregon and Montana, recognize a property manager license instead of a real estate agent license.
To obtain a real estate license, check out the requirements of your state’s relevant agency. This is usually called a licensing board, agency or something similar.
This certification was created by the Community Associations Institute, and is currently awarded by the National Board of Certification for Community Association Managers.
Certified members are kept up to date on local laws, and are required to undergo continuing education in order to maintain their membership.
This certification was created by NARPM, the National Association of Residential Property Managers. This is probably one of the more highly recognized certifications for property managers. To be awarded this certification, you need to have a real estate license in good standing, 2 years minimum experience, and you must have managed at least 25 units.
Created by IREM, the Institute of Real Estate Management, this is one of the more difficult certifications to achieve. You must have significant experience in property management and investing, and show that you either have a real estate license or are not legally required to hold one.
This certification is awarded by the National Apartment Association. It’s best for those who work in larger apartment buildings or for bigger companies with a portfolio. You are required to take a series of classes, complete a project and then pass a final exam.
Has a tenant recently asked you for a landlord reference letter? Or perhaps the tenant’s new place of residence has called, asking for a quick reference on the tenant?
Here are 5 important things you need to know when providing a reference, followed by a sample reference letter you can use to write for your tenant.
To Who It May Concern:
This tenant reference letter is provided on behalf of [tenant name]. They were tenants at [rental address] from [First Day of Lease] to [Last Day of Lease].
Condition of Property
The tenants kept the property in good condition. The following damages were noted upon their exit from the unit:
The security deposit of $___ was fully/partially refunded within the legally required time frame. If only part of the security deposit was refunded, it was because of:
No eviction notices were served on the tenants.
If you have any questions, please feel free to contact me. My information is below.
Regards,[Your Name] [Company Name, if Applicable] [Street Address] [City, ST, Zip] [Phone] [Email]
If you have a tenant who has stayed on without paying rent, they’re what’s known as a holdover tenant. This is often called “tenancy at sufferance” in the legal profession.
You might, however, consider them a squatter. A Squatter is defined as:
a person who settles on land or occupies property without title, right, or payment of rent
In other words, a squatter is someone who lives in your rental unit, but does not have the legal right to be there. The worst thing about squatters, is that in some more “enlightened states”, it can be almost impossible to get them removed from your property. California – we’re looking at you!
The rise of house sharing platforms like AirBNB or VRBO has created a huge rise in squatters, or previously paying tenants who now have stopped paying the rent. Why, you ask? California, and many other states, have laws that define tenants as anyone who has lived in a property for 30 days.
If you rent out your AirBNB for more then 30 days, in those states, your “guests” would become tenants. If they stopped paying, that means you’re going to need to evict them.
Hopefully you don’t have rental units just lying vacant. But if you do, you may end up with the worst kind of Squatters – the kind that trespass and refuse to leave. As a law abiding landlord, is the law on your side?
It depends, as always, on the city and state you live in. If your squatters manage to fulfill certain requirements, the law might recognize them as lawful residents. For example, in some states, just getting utilities hooked up under the squatter’s name can be considered residency!
If the squatters establish this important distinction, then the police are not going to help. You’re going to turn to the civil courts, a process that may take months or years. In the meanwhile, you’re up the creek while your unit is in limbo.
If you end up with either illegal squatters or tenants requiring an eviction, then it’s important not to do things that may harm your cause later in the eyes of the law. In other words, don’t shoot yourself in the foot.
If your vacant rental unit ends up being squatted, here’s what you should do right away:
You need to be careful with your rental property, and protect yourself at all times against squatters. If you do end up with them, make sure you know exactly how to handle them according to your state and local laws before going forward.
There are a lot of good reasons to raise the rent. In fact, training your longer term tenants to expect a yearly rental increase can be one of the best ways to guarantee an increase in the return on investment of your rental properties. Additionally, it serves as a good hedge against inflation.
Some Landlords feel bad or awkward about raising the rent, but remember, it’s just a cost of doing business.
Below, you’ll find tips on how to increase the rent without losing your tenants, as well as a free rental increase template for you to modify.
In your initial rental contract, add language that, on renewal, mentions a rental increase. You can either mention a real number or use a percentage. Try not to overcharge, 3-5% is usually a good bet. Of course, if rents skyrocket in your market at the end of the lease, you’re not required to renew with that tenant.
Check with your local landlord association to make sure this is legal in your state.
Let the tenant know way in advance that you’re going to raise the rent. If they don’t want to stay, then you’ll have time to properly market and rent out the unit, lowering your vacancy rates and keeping your cash flow going.
You can send the letter via email, or mail. It’s up to you if you want to explain why you want to raise the rent. Sometimes, mentioning an increase in your expenses (such as local taxes, heating, etc), may make the tenant more open to a rental increase.
If a new lease is required, make sure to send it to the tenant to get their signature and renewal.
Re:Notice of Rent Increase
Dear [Tenant’s Name],
Your lease at the property listed above will expire on [Lease Expiration Date].
Effective [Rent Increase Date], the monthly rent for this property will increase to $____. This represents a change of $___ from your current rent, $____ per month.
If you wish to continue with your [lease agreement/month to month tenancy], you will be required to pay this new amount. The rest of your lease agreement shall remain the same, with all terms in force and effect. Should you not wish to renew your lease agreement with us, please provide us with notice as soon as possible, but note then the legally required date of [Last Day Notice Date].
Please contact me with any questions or concerns you have, at [contact information].
As always, the law has something to say about rental increases. If you are a landlord in an area with rent control or rent stabilization, then there are significant restrictions on your ability to raise rents.
Additionally, you cannot raise the rent in the middle of a fixed lease contract. If you rent to section 8 tenants or through another HUD or local agency program, there may be additional restrictions on rental increases.
For tenants who signed a lease, you cannot arbitrarily raise the rents until the period is up. If you placed a clause in your lease agreement to allow for rental increases within the term, note that many courts frown upon this and may invalidate your entire lease agreement.
For month to month tenants, you can raise rents as long as you provide proper notice. The notice period will vary by state. Your notice must be provided in writing. As with any important communication with a tenant, we strongly suggest registered mail at a minimum.
Additionally, you cannot raise the rent in a way that is discriminatory. Meaning, you can’t raise a rent due to race, religion, or something else you don’t particularly like about the tenant.
If a tenant has filed a complaint or exercised a legal right, raising the rent within a certain period may well be viewed as “retaliation” by the courts.
You can’t charge whatever you want for a rental, because tenants will go elsewhere. Make sure to know your local rates. Keeping your rates within the market range will ensure that tenants stay, even when you raise the rents a bit.
This guide will take you through the eviction process, and will give you the steps necessary to properly evict/kick out a tenant from rental property. Note that we are not lawyers and the aim of this guide is to provide general guidelines. Contact legal counsel before proceeding.
Important notice to landlords in California, Florida, and New York: You will have extreme difficulty in evicting tenants in these states. These states are notoriously tenant friendly, and you may not be able to evict. Please contact your local landlord association or attorney before even beginning the process.
If this is your first time having to evict someone, don’t bee to hard on yourself. Evictions are simply part of the process of being a landlord. Even great tenants sometimes have issues. Your job is to be sympathetic but firm. In other words, pay or get out.
While it may seem harsh, at the end of the day, your job is to make money from your rental properties. Letting someone stay in your unit rent free is a surefire way to lose your shirt in the real estate business.
Don’t get me wrong – it can be really depressing to evict a tenant whom you have a relationship with. But sometimes, you don’t have a choice. And when it comes to being nice or making sure you get paid, you need to get paid.
The eviction process starts with having a valid reason to evict a tenant.
Let’s get started:
Eviction laws are different from state to state (see our above notice, for example). More so, eviction laws can even be different by county. Some counties enact ordinances or requirements that may make it more difficult then the minimums set by the state.
Because evictions are a legal issue, it’s important that you start from a solid legal basis. We recommend using a lease agreement that is written by lawyers, designed specifically for you state. Your local landlord association or real estate broker may have a standardized set of lease agreements for you to use.
If you’ve used a custom lease agreement, it’s important to take a few minutes and make sure that the lease you used will allow you to evict your tenant. Otherwise, you may lose your case in eviction court when the time comes.
As much as you’d like, you can’t just kick the tenant out after they’ve violated their lease. These type of evictions are illegal and unlawful and may completely wreck any attempt at actually getting the tenant out.
Specifically do not:
Remember that evicting someone is a legal process that can take time. If you act rashly or outside the scope of this process, you can seriously harm your case in court.
You can’t evict someone just because you don’t like them. You need to have a legitimate, legal reason for attempting to evict a tenant.
Typical good reasons for evicting a tenant include:
Make sure you have proof (the more, the merrier), so you can prove your case in court.
This is a good question. It really depends on the situation, why you need to evict, and what the rental market is like in your area.
For example, in a soft rental market, where you may not be able to get another tenant, attempting to reason with a tenant who is a bit behind on the rent might make sense.
Conversely, in a strong market, you probably can afford to be much stricter with your tenants.
Generally speaking, it’s best to have a written process in place and enforce it equally among all your tenants. Otherwise, you open yourself up to both Fair Housing lawsuits, and the possibility that you may lose your eviction case as well.
Once you’ve decided you want to evict your tenant, you need to provide the tenant with an eviction notice. In legal jargon this may also be called a “notice to quit”. Below we’ll provide a general guidelines of eviction notices, however it’s important to note that this process varies greatly by state.
At this point, the eviction process has formally begun.
Hopefully, your tenant will “cure” the issue by paying the rent or making repairs, but sadly that’s not often the case. Now the clock starts ticking, and once the specified time has passed, it’s time to file in local court.
The next step is to go to your local court, and file the eviction paperwork. If you’re a bigger landlord with several units, you may have an attorney on retainer who does this for you. In some states, you must file eviction with an attorney. In other states, you can file yourself.
Go to the appropriate court or their website, and ask the clerk for the paperwork necessary to file an eviction. At this point the clerk will issue a summons, and your tenant will need to show up in eviction court.
(Bonus:If your tenant doesn’t show up, then you win the case by default!… Usually.)
Assuming your tenant hasn’t already flown the coop, then it’s time to go to court and win your case.
Bring as much documentation as you can, including:
The court will usually decide at the time of the case.
If you’ve won, then read on.
Once you’ve won your eviction case, you can now evict your tenant.
If your tenant hasn’t physically left, you can go the local sheriff or bailiff who will help you evict the tenant. In general, it’s better to have the law do this for you. Eviction processes have been known to get violent, so you’re best making sure a professional gets them out if they haven’t already.
Alright, your eviction is done. Hopefully it won’t happen again. Here are some helpful hints to help you get better tenants:
Decided to make the switch from checks to online rent payment? By the end of this guide you should be able to:
One of the biggest pains in being a Landlord is collecting the rent. Whether “The check is in the mail” or consistently late tenants, what makes owning rental property so rewarding (the money), can often be the most difficult part of ongoing property management. That’s probably why it’s one of the most important parts of the job.
Over the past few years, more and more companies have entered the online rental payment space, targeting different markets and users. They use different technologies and different options, but the desired end result is the same: fast, effortless rent collection.Start Accepting Rent Online
In a word, yes. Having your tenants set up to pay online every month, is one of the best things to happen to Landlords and Property Managers. Keep in mind that most people (especially millennials), don’t even use checks anymore. So not only do they have to write you a check, they have to remember how to use a check in the first place!Start Accepting Rent Online
When you switch from receiving checks to processing direct deposits, you make life a lot easier for both yourself and your tenant:
There are a few different methods that you can use to get paid online. Each has their own pluses and minuses, and we’ll discuss them here:
ACH stands for automated clearing house, and is what the banks use to handle transferring money to each other. If you’ve ever used direct deposit as an employer or employee, it’s basically the same system.
The primary benefits of ACH include:
This is the cheapest system to use, and is also the most secure. It’s also the one that powers our online system, which you can sign up for here.Start Accepting Rent Online
In theory, accepting credit cards seems like a good idea. Almost everyone has one, everyone knows how to use it, and you don’t have to worry if your tenant can’t afford the bill later on.
There are two main problems with credit cards for Landlords, which makes accepting them a bit of a risk, as well as expensive:
If you work with a lot of low income tenants, offering the option of credit cards can allow a third party (a well to do relative or friend) to pay the occasional payment on time. Additionally, if your tenants don’t have bank accounts, they may prefer to use prepaid bank cards that they can buy at places like CVS, Wallgreens or Krogers.Start Accepting Rent Online
Paypal has been around since the beginning, and is a well trusted name in the payment space. That being said, it’s important to understand the risks involved with taking any kind of money from paypal:
Demand drafts are these little known method for accepting checks. Mostly used by telemarketers, the idea works like this: You receive permission from your tenant each month to print a check in their name, with their account information. It doesn’t need to be signed. There is special software that does this for you. Then, you take this to the bank and deposit it like a regular check.Start Accepting Rent Online
Services like PayNearMe let’s the so-called “underbanked” (people who don’t have bank accounts, typically lower income), pay rent in cash at places like 7-11.
Yes, our service is 100% safe and uses the same level of encryption and security that banks use, as well as companies like Amazon.com.
It currently costs $1.99 for each rental payment you accept.
Simple, click here to get started.Start Accepting Rent Online
RentApplication.com is the only service that allows you to easily find tenants, screen them and collect rent, automatically. Collect Rent and never have to worry about prorating again. We're offering a free trial, which includes free tenant lookups, a free rental website, and more. Try it todsy!
One of the questions that we see asked a ton is “How Do I Calculate the Prorated Rent on My Unit”?
Before we answer that question, let’s answer an important question:
Prorated rent is how much you, the landlord, charge a tenant when the tenant is occupies the rental for a unit less that specific on the lease.
The most common example is a tenant who starts a monthly or yearly lease in the middle of the month. Normally, you charge them for a whole month, but they won’t be living in the unit for a whole month at some point of the term. Since your daily rental rate is often significantly higher then your monthly rate, you need to prorate the apartment rental.
Simple – it’s the honest, fair thing to do. It’s the best method for when tenants want to move in for odd lease durations, or need to get a 4.5 month lease or something similar.
There are two popular methods to prorate rent:
1. Number of Days in the Year
While popular in certain segments of the rental industry, it can be confusing to tenants. It’s technically the most accurate for a yearly lease, but can sometimes cause confusion and short change tenants during months with shorter days.
Here’s the formula to prorate yearly:
((Months Rent * 12) / Days in The Year)) * The Number of Days The Tenant Needs to Pay
If we took an example of August 18th Moving in Day, and a monthly rent of $1000, the equation ends up being:
((1000 * 12/ 365)) * 14 = $460.27
2. Prorate by the Number of Days in the Month
This method is simpler, easier to calculate, and ultimately ends up being fairer to tenants.
((Month's Rent) / Days in the Month)) * The Number of Days The Tenant Needs to Pay
Using our example again from above of August 18th with a $1000/m rental:
((1000 / 31)) * 14 = $451.61
Notice how the monthly prorated came out to slightly less then the yearly prorated? The yearly prorated will be more on months with 31 days.
The nice thing about the monthly pro-ration is it works extremely well for those who often rent month to month. And since your rents can be all over the place depending on demand, it makes sense to prorate based on the actual month the tenant is renting.
Additionally, it’s dead simple. Your tenants will get it and you shouldn’t have that many problems or pushback from them.
Local Laws and Prorating
As always, check with your local government about specifics related to prorating the rent. In Los Angeles, for example, the courts have decided that a rental month is always 30 days for evictions, so use that for your prorating.
Summing Up About Prorating and Rental/Lease Agreements
Whatever method you decide to use to prorate, be consistent. Specify how you’re prorating in your lease, when you take the prorated rent (some Landlords will prorate a longer term lease on the second month to smooth out income and make sure you can pay the rent), and what method you’ve decided to use to prorate the rent. Once you’ve done that, stick to it!
At the end of the day, prorating is not a difficult concept.
Post in the comments if you have questions or opinions on how to prorate!