Pro rating rent when a tenant moves in helps a landlord to generate additional rental income, keep occupancy levels higher, and maximize the amount of money collected.
While there are four methods for pro rating rent, each yields a different result depending on which month a tenant moves in.
By choosing the best method for pro rating rent based on the number of days in the month, a landlord can increase the amount of pro rated rent collected from a tenant.
- Pro rated rent is used to calculate how much rent is due when a tenant moves in on a day other than the 1st of the month.
- Collecting pro rated rent helps a landlord to increase rental income, collect more money up-front, and keep occupancy levels higher.
- Four methods for pro rating rent are actual days in the month, average days in the month, banker’s month, and days in the calendar year.
- Amount of pro rated rent varies based on the number of days in the month and the proration method used.
What does pro rated rent mean?
The phrase “pro rated” means dividing something up, usually based on time or the amount used. For example, when someone fills up their car with gas, the gas station charges for the number of full gallons used plus the partial gallon pumped into the tank.
Pro rating rent in real estate is used to charge a tenant for the portion of the month that they actually lived in the home. If a tenant moves in the middle of July, a landlord would charge the tenant of ½ of a month’s worth of rent, instead of the entire month.
Benefits of collecting pro rated rent
In most states, there’s no law that says a landlord has to collect a pro rated rent if a tenant doesn’t move in on the first of the month. In the above example, the landlord could decide to waive the rent payments for the half of the month the tenant moves in.
However, it’s probably safe to say that most landlords could use a couple of weeks of extra cash flow, especially with the way that prices are rising today.
Here are some of the biggest potential benefits of collecting pro rated rent when a tenant moves in.
Additional rental income
Pro rated rent creates extra incremental cash flow for a landlord. Instead of giving a tenant free rent, or telling the tenant they have to wait until the 1st of the month to move in, rental income starts flowing the day a tenant moves in when a landlord pro rates.
Improve occupancy levels
The quicker a new tenant moves in, the fewer days a rental property sits vacant. A rental property that is occupied as close to 100% as possible helps to make a good impression on a lender or silent business partner, because they see the property is generating maximum cash flow.
Having a tenant move in early can also reduce the risk of something going wrong, such as a tenant changing their mind and moving somewhere else or a water pipe breaking when no one is around.
Increase up-front money collected
As a rule of thumb, a landlord will pro rate rent through the end of the month, then begin collecting a full month of rent on the 1st of each month. When a tenant first moves in, a landlord may collect the first full month of rent, any pro rated rent, plus a tenant security deposit.
For example, assume a home rents for $1,500 per month and a tenant moves in on November 18th. If the landlord-tenant laws for the state the home is located in allow a landlord to collect a maximum security deposit of 1 ½ months’ rent, a tenant would be required to pay $4,400 before moving in:
- 1st month rent $1,500
- Pro rated rent $650 ($1,500 month / 30 days in November = $50 per day x 13 days)
- Security deposit $2,250
- Total up-front money collected $4,400
Improve cash flow timing
Having the rent due on the 1st may make it easier for a tenant to remember when the rent is due, and to calculate late fees if the rent isn’t paid on time. Pro rating rent can also improve cash flow timing for a landlord. That’s because the sooner rental income is received, the quicker property operating expenses and the mortgage can be paid.
Create more perceived value
People value what they pay for, and see less value in things that they get for free, as this article on Business Insider explains. By allowing a tenant to move in early and not collecting pro rated rent, a landlord may be creating future problems by sending the wrong message to a tenant. If a tenant doesn’t value the place where they live, they may be less likely to worry about paying the rent on time or taking good care of the home.
4 different ways to pro rate rent
The examples used in this article so far pro rate rent using the number of days in the actual month. However, there are actually 4 different ways a landlord may pro rate rent.
Each calculation produces a slightly different pro rated rent amount, so a landlord may wish to specify in a tenant’s lease which proration method is used to help avoid disagreements down the road.
By the way, the day a tenant moves in “belongs” to the tenant. In other words, if a tenant’s move in date is the 15th the rent begins on the 15th, even if the tenant does not move in until late afternoon or evening.
1. Actual days in current month
Each month has the following days:
- January = 31
- February = 28 (non Leap Year)
- March = 31
- April = 30
- May = 31
- June = 30
- July = 31
- August = 31
- September = 30
- October = 31
- November = 30
- December = 31
Let’s assume the rent is $1,500 per month and the tenant moves in on the 15th of the month. Here’s how the pro rated rent would be calculated using the actual number of days for January, February, and April:
- January daily rate: $1,500 / 31 days = $48.39 per day
- Days that belong to tenant: January 15th – January 31st or 17 days
- Pro rated rent: 17 days x $48.39 = $822.63
- February daily rate: $1,500 / 28 days = $53.57 per day
- Days that belong to tenant: February 15th – February 28th or 14 days
- Pro rated rent: 14 days x $53.57 = $749.98
- April daily rate: $1,500 / 30 days = $50 per day
- Days that belong to tenant: April 15th – April 30th or 16 days
- Pro rated rent: 16 days x $50 = $800
2. Average number of days
A second method for pro rating rent is by using the average number of days in a month. To find the average number of days, divide 365 days in a year by 12 months:
- 365 days per year / 12 months = 30.42 days per month
To pro rate the rent, simply divide the monthly rent by 30.42 days, then multiply the number of days that belong to a tenant. For example, if the rent is $1,500 per month, the pro rated daily rent would be $49.01:
- $1,500 monthly rent / 30.42 average days per month = $49.31 pro rated daily rent amount
Here’s how the pro rated rent is calculated for January, February, and April, assuming a tenant moves in on the 15th of the month:
- January: 17 days that belong to tenant x $49.31 = $838.27
- February: 14 days that belong to tenant x $49.31 = $690.34
- April: 16 days that belong to tenant x $49.31 = $788.96
3. Banker’s month for pro rating rent
Pro rating rent using a banker’s month assumes that every month has 30 days, at least for pro rating purposes. So, if the monthly rent is $1,500 the pro rated daily rent would be $50, regardless of how many days are in the actual month:
- January: 17 days that belong to tenant x $50.00 = $850.00
- February: 14 days that belong to tenant x $50.00 = $700.00
- April: 16 days that belong to tenant x $50.00 = $800.00
4. Days in the calendar year
To pro rate rent based on the days in the calendar year, multiply the monthly rent by 12 months, then divide by 365 days in the year:
$1,500 monthly rent x 12 months = $18,000 / 365 days = $49.32 pro rated daily rent
Then, multiply the pro rated daily rent by the total number of days that belong to the tenant:
- January: 17 days that belong to tenant x $49.32 = $838.44
- February: 14 days that belong to tenant x $49.32 = $690.48
- April: 16 days that belong to tenant x $49.32 = $789.12
How pro rated rent varies with different calculations
Now let’s take a look at how the pro rated rent varies depending on the calculation used.
For these examples, we’re assuming that the rent is $1,500 per month, and that a tenant moves in on the 15th of a month with 31 days (January), a month with 28 days (February), or a month with 30 days (April):
|Proration method:||Actual days||Average days||Banker’s days||Days in calendar year|
|January (31 days)||$822.63||$838.27||$850.00||$838.44|
|February (28 days)||$749.98||$690.34||$700.00||$690.48|
|April (30 days)||$800.00||$788.96||$800.00||$789.12|
Based on the above chart, a landlord may decide to use the proration method that generates the most rental income, making sure that the terms and conditions of the lease are updated accordingly.
For a month with 30 days, pro rating based on the actual days or banker’s days generates the most pro rated rental income. For a month with 31 days, the banker’s days proration method yields the highest amount of pro rated rent, while for February the actual days generates the largest total pro rated rent.