Landlord/Rent question

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BayernMunchen
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Landlord/Rent question

Post by BayernMunchen » Thu Jul 06, 2017 10:56 pm

Hi all,
I recently rented out my first home for July 1. The property management company notified me that the tenant I selected paid the entire first year rent at once to the property management company, who told me they will give me the entire year's rent this week. My plan is to place that money in a new separate savings account and make the payment each month on time to my mortgage holder. It is too risky to try and pay ahead on the mortgage -- if the tenant decides to move out then I owe him a lot of money.

My question is the following: an acquaintance today who I discuss real estate with told me that I have to hold it somewhere the money will gain interest for the renter/tenant in case he breaks the lease and decides to move out. Is this true? I never agreed that by him paying rent that I would gain him interest on his money.

Now, as it happens, I believe my bank's savings accounts to accrue interest. But the account will completely empty by one year, when the lease and the period the tenant paid for, expires.

Finance-MD
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Re: Landlord/Rent question

Post by Finance-MD » Thu Jul 06, 2017 11:23 pm

Laws vary by state.
I've never heard of paying the renter interest.

Please note that the IRS requires that you report advance rent for the year in which you are receiving it.
If you are receiving 12 months rent up front, you will only be able to get 6 months of depreciation and mortgage deductions to offset the taxable income rather than 12 months, which will give you a high tax bill in 2017.

Please discuss this with your property management company. Do they send you a 1099 for your rental income? Ask how much they will report. If they escrow the money and dole it out to you monthly, ask if that makes any difference.

Does the tenant have an early termination of subletting clause? If not, the rent is likely all yours even if the tenant ends the lease prematurely.

Last, be careful paying advance mortgage payments, they may just attribute all the extra to principal and still require another full payment the following month.

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cchrissyy
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Re: Landlord/Rent question

Post by cchrissyy » Thu Jul 06, 2017 11:50 pm

in my part of California, there are local laws regarding interest on security deposits but i've never heard of special requirements for holding advance rent, and furthermore, you have a very unusual lease indeed if it allows for a situation where the tenant can break it and be refunded, interest or not. please re-read your lease and check local laws until you are sure you understand what situations, if any, allow for a tenant to leave early and not still be liable for the full amounts due in the lease.

Ostentatious
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Re: Landlord/Rent question

Post by Ostentatious » Fri Jul 07, 2017 1:25 am

Also be careful about this tenant. This is often a sign of a bad tenant who can't find accommodation elsewhere without prepaying the rent. Hopefully you had a hand in selecting this renter.

SR II
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Re: Landlord/Rent question

Post by SR II » Fri Jul 07, 2017 1:41 am

Ostentatious wrote:Also be careful about this tenant. This is often a sign of a bad tenant who can't find accommodation elsewhere without prepaying the rent. Hopefully you had a hand in selecting this renter.
When my husband and his siblings rented out their mom's house (to help cover assisted living costs) in a very HCOL location, the tenant asked if he could pay the first year in advance in exchange for a small discount on the rent. They agreed to that arrangement. That was two years ago.

msk
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Re: Landlord/Rent question

Post by msk » Fri Jul 07, 2017 1:56 am

For my tenants I always offered a 5% discount for rents paid in 6 monthly instalments and a 10% discount for rents paid annually. I had some tenants staying for as much as a decade. This was mostly in the 1980s to 2000 when interest rates were higher. Only time I heard of interest payments discussed was on security deposits held in escrow in the UK and that was when my Australian colleague screamed blue murder when he was asked for a security deposit on a furnished house. He did receive the interest when he left at the end of the lease :greedy Very BH!

denovo
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Re: Landlord/Rent question

Post by denovo » Fri Jul 07, 2017 2:04 am

BayernMunchen wrote:Hi all,
I recently rented out my first home for July 1. .
You'll get better answers if you update your post with the state. Laws vary.
"Don't trust everything you read on the Internet"- Abraham Lincoln

denovo
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Re: Landlord/Rent question

Post by denovo » Fri Jul 07, 2017 2:05 am

Ostentatious wrote:Also be careful about this tenant. This is often a sign of a bad tenant who can't find accommodation elsewhere without prepaying the rent. Hopefully you had a hand in selecting this renter.
I could be wrong, but I read the post as the tenant giving the rent 12 months in advance unsolicited. I am sure OP will update us. But definitely interesting, either way.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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ResearchMed
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Re: Landlord/Rent question

Post by ResearchMed » Fri Jul 07, 2017 5:37 am

Yes, we need the state.
And also whether your rental agreement has any specifics about that. (That could be more strict than the state, but couldn't have terms that violate any state terms.)

Frequently, the security deposit (and perhaps "last month's rent" if required up front) must be kept in a *separate* account (from other renters, for example), in an interest bearing account. Because that money is likely to be paid back, the interest would go with it... unless there was damage, in which case the costs would be deducted from the total of security deposit and interest.

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bayview
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Re: Landlord/Rent question

Post by bayview » Fri Jul 07, 2017 5:45 am

In North Carolina, you must keep the security deposit in a separate account. Not pre-paid rent, though.
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Jack FFR1846
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Re: Landlord/Rent question

Post by Jack FFR1846 » Fri Jul 07, 2017 7:27 am

I used to read rental agreements back when I was in college before I and all my room mates (and our parents) signed it. Every single one of them had a clause where if we broke the lease, we owed the rent until the end of the lease. I once later did break a lease and the apartment complex was nice to not force me to pay for the rest of the year per the agreement. But I was prepared to continue sending my payment in if they didn't let me off the hook. As mentioned numerous times, state and even local laws vary on this.
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knightrider
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Re: Landlord/Rent question

Post by knightrider » Fri Jul 07, 2017 9:33 am

It is interesting to see all the people responding with "consult the local law" instead of just answering the OP's question. It is very simple. You put their money in some savings account and pay them the interest back after the lease is up. Interest rates are so low that this amounts to barely $10-20 over the year. Err on the higher side and just give them $20 ( assuming $1000 deposit ). No need to see any CPA/Lawyer to figure this out.

Some states say to put money in a separate savings account. I have never done that because it seems like a waste of my time. I think the idea is to give the tenant some illusion their money is "safer". In reality you can still withdraw it and go to the casino with it. So nothing safer in my opinion.

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ResearchMed
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Re: Landlord/Rent question

Post by ResearchMed » Fri Jul 07, 2017 9:43 am

knightrider wrote:It is interesting to see all the people responding with "consult the local law" instead of just answering the OP's question. It is very simple. You put their money in some savings account and pay them the interest back after the lease is up. Interest rates are so low that this amounts to barely $10-20 over the year. Err on the higher side and just give them $20 ( assuming $1000 deposit ). No need to see any CPA/Lawyer to figure this out.

Some states say to put money in a separate savings account. I have never done that because it seems like a waste of my time. I think the idea is to give the tenant some illusion their money is "safer". In reality you can still withdraw it and go to the casino with it. So nothing safer in my opinion.
Uh, yes. "consult the local law".

in our jurisdiction, if the money is *not* put in a separate savings account, the penalties can be substantial.
Not worth it at all, in our opinion. It's so simple to open a separate account.
The "idea" is to comply with the relevant laws.

But in our jurisdiction, that is only for the security deposit, and (in the past) any "last month's rent" required.
There is no such requirement for any rent paid "in advance", other than that last month, unless the terms of the lease are more stringent.
One could keep it in the bank, or use it for a vacation, etc.
If the lease is broken, that would be handled however it would have been regardless of whether the money received is in the bank or not. IF any needs to be returned, then that would still be necessary. Again, local laws would dictate how this is handled, as would the specific rental agreement.

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knightrider
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Re: Landlord/Rent question

Post by knightrider » Fri Jul 07, 2017 9:51 am

ResearchMed wrote: Uh, yes. "consult the local law".

in our jurisdiction, if the money is *not* put in a separate savings account, the penalties can be substantial.
Not worth it at all, in our opinion. It's so simple to open a separate account.
The "idea" is to comply with the relevant laws.
Opening an account is not so simple. Last time I did it, I had to go to the bank twice and the whole process took over an hour as they had tons of paperwork to fill out. I know you are going to say you can open it in 10minutes online. But I would rather do it in-person with a bank I already have a relationship with.

I don't understand why penalties would be "substantial"? Like I said no matter where the money is, the landlord can withdraw it anytime and use it to go gambling. What value does it add to put it in a separate account?

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ResearchMed
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Re: Landlord/Rent question

Post by ResearchMed » Fri Jul 07, 2017 10:02 am

knightrider wrote:
ResearchMed wrote: Uh, yes. "consult the local law".

in our jurisdiction, if the money is *not* put in a separate savings account, the penalties can be substantial.
Not worth it at all, in our opinion. It's so simple to open a separate account.
The "idea" is to comply with the relevant laws.
Opening an account is not so simple. Last time I did it, I had to go to the bank twice and the whole process took over an hour as they had tons of paperwork to fill out. I know you are going to say you can open it in 10minutes online. But I would rather do it in-person with a bank I already have a relationship with.

I don't understand why penalties would be "substantial"? Like I said no matter where the money is, the landlord can withdraw it anytime and use it to go gambling. What value does it add to put it in a separate account?
"Why" substantial penalties?
That's the way the local laws are written.
And those penalties would apply if the landlord removed the funds early or for inappropriate reasons.
We didn't write the laws. We simply complied with them when we had tenants.

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Topic Author
BayernMunchen
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Re: Landlord/Rent question

Post by BayernMunchen » Fri Jul 07, 2017 11:52 am

Thanks for the replies. I'm in Rhode Island. This was unsolicited. He appears to be an outstanding candidate for tenant. He makes well over 3x the rent, has no eviction history, great credit and just relocated here, working for a high end hotel chain as an executive. It appears they gave him 15K to move here if he accepted a job. He drives an Audi. I guess with the bonus to move here, he decided to pay the rent in full.

As far as breaking the contract, I believe he can break the lease with 60 days notice. I'll have to dig up the lease agreement. So I wouldn't want to spend any of it and then find out he's leaving in 60 days. If he leaves in the first year, however, (as a separate and good issue for me) the property management co will find me another tenant for free -- they have a 1 year guarantee on tenants since we use a stringent background check to eliminate most all of those who apply to live there.

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cchrissyy
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Re: Landlord/Rent question

Post by cchrissyy » Fri Jul 07, 2017 2:37 pm

The unsolicited lump sum payment makes me wonder why... I've pondered what would make ME do such a thing and I have two guesses for you, neither of which is an emergency from your perspective but both would explain why a person would voluntarily sock money into prepaid rent instead of holding on to it for their own investment or liquidity. I bet they're getting ducks in a row in anticipation of divorce or bankruptcy, and they know that prepaying large bills including their rent is a good way to protect money during that process and to keep their living situation stable and strong as it can be, considering.

JGoneRiding
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Re: Landlord/Rent question

Post by JGoneRiding » Fri Jul 07, 2017 7:52 pm

knightrider wrote:It is interesting to see all the people responding with "consult the local law" instead of just answering the OP's question. It is very simple. You put their money in some savings account and pay them the interest back after the lease is up. Interest rates are so low that this amounts to barely $10-20 over the year. Err on the higher side and just give them $20 ( assuming $1000 deposit ). No need to see any CPA/Lawyer to figure this out.

Some states say to put money in a separate savings account. I have never done that because it seems like a waste of my time. I think the idea is to give the tenant some illusion their money is "safer". In reality you can still withdraw it and go to the casino with it. So nothing safer in my opinion.
No need to see a lawyer a quick read of their states laws online should ans the question. I read the WACs regularly regarding issues like this. Most states are easily searched. Mine has no int requirements

ralph124cf
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Re: Landlord/Rent question

Post by ralph124cf » Fri Jul 07, 2017 8:10 pm

In Chicago, which is a very tenant friendly city, security deposits must be held in an interest bearing account and the interest paid to the tenant yearly. Nothing is said about how to handle advance rental payments.

In general, a landlord must make a good faith effort to rerent a vacant property, and refund any advance rents that are covered by the new tenant.

Ralph

knightrider
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Re: Landlord/Rent question

Post by knightrider » Fri Jul 07, 2017 9:21 pm

JGoneRiding wrote: No need to see a lawyer a quick read of their states laws online should ans the question. I read the WACs regularly regarding issues like this. Most states are easily searched. Mine has no int requirements
My point was you should pay interest no matter what your state law says. That is simply the right thing to do since most "reasonable" tenants would expect that from a landlord.

I was pointing out that people should not just say "see state law" while ignoring the bigger picture of why these laws exist.

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Re: Landlord/Rent question

Post by boglephreak » Fri Jul 07, 2017 11:39 pm

knightrider wrote:
JGoneRiding wrote: No need to see a lawyer a quick read of their states laws online should ans the question. I read the WACs regularly regarding issues like this. Most states are easily searched. Mine has no int requirements
My point was you should pay interest no matter what your state law says. That is simply the right thing to do since most "reasonable" tenants would expect that from a landlord.

I was pointing out that people should not just say "see state law" while ignoring the bigger picture of why these laws exist.
why would you put an obligation on yourself if you are not required to do it, and why would a tenant expect something that may not be required by law? also, consult your local law absolutely is the correct answer to a new landlord who is asking questions. they should be familiarizing themselves with the law, not just make assumptions or follow made up rules.

JGoneRiding
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Re: Landlord/Rent question

Post by JGoneRiding » Sat Jul 08, 2017 10:34 am

knightrider wrote:
JGoneRiding wrote: No need to see a lawyer a quick read of their states laws online should ans the question. I read the WACs regularly regarding issues like this. Most states are easily searched. Mine has no int requirements
My point was you should pay interest no matter what your state law says. That is simply the right thing to do since most "reasonable" tenants would expect that from a landlord.

I was pointing out that people should not just say "see state law" while ignoring the bigger picture of why these laws exist.
The going int. Rate for brick and mortar banks is 0.01% there IS NO int to be earned! Why would I just give money away? That is not how to run a business . Especially money I already gave 25% to 28% to the government.

In My state you can mix deposits into one acct. I have 4 rental units. I think total last year the int was less than 1.50

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