As a property investor, rent is likely your biggest source of income and a major component of your cash flow. However, when tenants don’t occupy the unit the entire period of the rental term, how should you charge them, keeping your bottom line and best interests in mind?
Consider charging prorated rent, which keeps things fair between you and your tenant, and can also strengthen the relationship for long-term benefits. A strong landlord-tenant connection is ideal for your business, so if the circumstances make sense to prorate rent, offering that “discount” sets that relationship up on a positive foot—and establishes you as a fair and reasonable landlord from the start.
Prorated rent is just what it sounds like—a partial rent payment for when a tenant spends a partial term in the property. This accounts for if they move in late or move out early. Think about it: It wouldn’t be fair for a tenant to pay a whole month’s worth of rent if they’re only occupying the unit half the time. Tenants may request prorated rent, but it’s ultimately the landlord’s decision, which should be formalized in writing.
It’s common for tenants moving in after the first of the month to request prorated rent. It’s up to your discretion to determine how far into the month qualifies them to pay a prorated portion. If they move in on the second, maybe you don’t charge a prorated rate. However, if they move in the 15th and are only living in the unit for half of the month, it would be fair to prorate and ensure your tenant is satisfied.
However, this depends on the situation. If the unit is vacant and available for move-in, and the tenants choose to move in later, they might not have as strong an argument to ask for prorated rent.
You might also want to consider adjusting the rental period to make the period start on their move-in date. So, a tenant who moves in the 14th pays rent on the 14th of each month, and will move out on the 13th. This way you avoid prorating, but could end up complicating your process if you have multiple units on the same cycle.
If the tenant chooses to move out before the end of the month, they also don’t have a great reason to ask for prorated rent. If no one is breaking the lease agreement, they are on the hook to pay rent for the month. However, if you’re requesting that they vacate prior to the end of the month, you should consider charging prorated rent. Some reasons why you’d need tenants to move out early include major maintenance or construction, if you’re selling the unit, or if you have new incoming tenants who have to move in early.
Prorating rent for the right situations can benefit your landlord-tenant relationship, leading to lease renewals and referrals. It will help you secure a tenant by showing you’re flexible to their needs and moving schedule. If a unit has been hard to fill, prorating can also help you secure a tenant. By showing you have their best interests at heart, rather than your own profit, you’ll benefit long term with full units and desirable tenants.
There are two common ways to calculate prorated rent: Charge for the number of days the tenant spends on the property based on the monthly rate or the yearly rate. You can do the math easily on your own, or use an online prorated rent calculator.
This is a two step process:
Here’s an example where a tenant spends 15 days of July in a unit that costs $950/month.
If your tenant is signing a year-long lease or longer, this is a preferred way to calculate prorated rent. This is a three step process:
Here’s the same example as above, but calculated for the yearly rate:
As a note, this extra step adds a layer of complexity that can confuse the tenant, but provides the most accurate amount for year-long leases. Either way you calculate it, make sure to be clear and transparent with your tenant to build that relationship of trust.
In most jurisdictions, landlords are not legally required to prorate rent when a tenant moves out early. This circles back to the lease agreement where the tenant committed to pay rent for the entire month. However, there are some laws that do stipulate a landlord’s responsibilities to prorate and how to calculate it, which vary by state. If you’re unsure about local legislation, consider bringing on a property manager who is well-versed in housing regulations and the jurisdiction’s property laws.
It’s a common practice for a landlord to require the first month to be paid in full, starting the rental period the date of move in, and then prorate the second month to get back to the standard period beginning the first of the month. This is to guarantee the tenant is financially viable to cover the cost of rent while still being fair.
If you and your tenant have come to a positive agreement on prorated rent, include it in the lease agreement as well as the move-in date—using a standard lease agreement is not a good idea. Customizing your lease and putting it in writing protects both you and the tenant, and removes any ambiguity. This way you know how much money is going to be paid and when the unit is going to be occupied. Failure to formalize an agreement can put you at risk for a lawsuit or remove your opportunity to take legal action if there is an issue.