If you’re a landlord or property manager unsure how to account for the first and last month’s rent, you’re not alone! This can be confusing, but it’s important to get it right.
In this blog post, we’ll explain how to ensure you’re correctly accounting for the first and last month’s rent. We’ll also provide tips for avoiding potential mistakes and keeping your books in order.
- Some landlords require first and last month’s rent from new tenants, which is known as prepaid or advance rent.
- Depending on state landlord-tenant laws, a landlord may collect a security deposit in addition to the first and last month of rent.
- Be sure to indicate in your lease agreement whether the tenant is responsible for the first and last month’s rent and a security deposit.
- If a tenant moves out before their lease is up, the landlord may keep the prepaid rent to cover any unpaid rent or damages caused by the tenant.
- Accounting for the first and last month’s rent correctly is essential to avoid financial penalties or legal issues.
Why do some landlords collect the first and last month of rent?
You may have come across the term “first and last month’s rent.” This is simply a prepaid rent agreement where the tenant pays the landlord the first and last month’s rent up front. There are a few reasons why landlords might collect prepaid rent from their tenants:
- The tenant is less likely to move out early because they’ve already paid for the last month.
- If the tenant does move out early, the landlord has already been compensated for that last month.
- The landlord can use that last month’s rent as a buffer in case the property is vacant for some time.
There are also some potential drawbacks to consider as well. For example, collecting the first and last month’s rent may make it difficult to evict a tenant if they stop paying their rent. In most states, landlords are required to give tenants advance notice before evicting them, but if you’ve already collected the rent for those months, the tenant may be entitled to stay until the end of the lease.
Asking for the first and last month’s rent can also strain your relationship with your tenants. While some tenants may appreciate the convenience of not worrying about paying the last month of rent, others may feel like they’re being taken advantage of.
If you collect first and last month’s rent from your tenants, you must be transparent about why you’re doing it and ensure your tenants understand the risks involved.
How to apply first and last month’s rent payments
When you collect the first and last month’s rent from a new tenant, you are essentially receiving prepaid rent or advance rent. The last month’s rent is considered income in the current year, even if it is not used until the following year. As such, it should be recorded as income on your books using the cash basis of accounting.
As the Internal Revenue Service (IRS) explains in Tips on Rental Real Estate Income, Deductions and Recordkeeping, “Advance rent is any amount you receive before the period it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.”
For example, assume you sign a 12-month lease with a tenant on May 1 and receive $1,000 in rent for May and $1,000 for the last month of rent for April of the following year. You must include $2,000 in your rental income in the first year.
Prorating the first and last month’s rent
When the tenant moves in on the first of the month, calculating the first and last month of rent is pretty straightforward. But what happens if your tenant wants to move in early?
Prorated rent is a type of rental agreement where the tenant only pays for the number of days they occupy the unit. For example, if your rent is $1,000 per month and the tenant moves in on the fifteenth day of a month with 31 days, they would only owe $548.42 for that month.
The way to calculate this is by taking the total amount of rent due and dividing it by the number of days in the month. In this case, you would take $1,000 and divide it by 31 days to get a daily rate of $32.26. You would then multiply that by the number of days you occupied the unit, which would be 17, including the day they moved in. This would give you a prorated rent amount of $548.42 for that month.
As a landlord, you can collect the first and last month’s rent when a tenant moves in midmonth and the prorated amount for the current month. In our example above, this would be $2,548.42 ($1,000 for first month + $1,000 for last month + $548.42 for prorated current month). You would then collect this amount from the tenant up front when they move in.
Keep in mind that some jurisdictions have laws limiting how much landlords can collect in prepaid rent. So be sure to check your local laws before collecting any prepaid rent from your tenants.
Can you collect a security deposit and the first and last month of rent?
In most states, landlords can collect a security deposit equal to one month’s rent. They may also be permitted to collect the first and last month’s rent in advance.
There are pros and cons to collecting a security deposit and the first and last month’s rent. On the one hand, it protects the landlord if the tenant damages the property or doesn’t pay rent. On the other hand, it can be a financial burden for tenants to come up with a large sum of money up front.
The bookkeeping for a security deposit is fairly simple. The landlord should keep the security deposit in a separate bank account and only use it for repairs or cleaning if the tenant damages the property. If any money is left over when the tenant moves out, it should be returned to the tenant.
A security deposit is not considered rental income unless it is applied to the last month of rent. This is because the security deposit is meant to protect the landlord from damage or nonpayment, not to make a profit.
Remember that landlord-tenant laws vary from state to state, so it’s important to check your local laws. Keep good records of all money collected and spent on your rental property, as this will help you in case of any disputes.
How to keep track of prepaid rent
When you’re a landlord, tracking prepaid rent is essential to maintaining accurate records and ensuring you receive the payments you’re owed. There are several methods you can use to keep track of prepaid rent, each with pros and cons.
One option is to maintain a handwritten general ledger. This can be a simple way to keep track of payments, but it can be easy to make mistakes when writing in a ledger and difficult to generate reports or spot trends over time.
Another option is to use a spreadsheet, such as Microsoft Excel or Google Sheets. This can be more efficient than keeping a handwritten ledger, and you can easily create formulas to calculate rental income and expenses. However, it can still be easy to make mistakes when entering data into a spreadsheet, and it can be time-consuming to generate reports.
The third option is to use rental property software designed specifically to track rental income and expenses. Rental property software can be more expensive than a spreadsheet, but it can save you time by automating tasks like generating reports and calculating rent payments. Some rental property software programs also allow you to collect rent payments from tenants online, saving you even more time.
Free rental property accounting software from Stessa may be the best option for landlords with small property portfolios to keep track of prepaid rent, rental income, and operating expenses, generate financial reports, and collect rent payments from tenants online.
With Stessa, a Roofstock company, there’s no need to enter data manually. Instead, simply connect your bank and credit card accounts, and Stessa will automatically import your transactions. Best of all, Stessa is free to use – sign up today to get started!