We all know how convenient it is to have new tenants come in on the first or last day of a month and we can just pick up where the last tenant left off. It’s easy to get the next person up and running in your finances, and as a landlord, it’s far less of a hassle come tax time.
But what about the times that a tenant has to leave in the middle of a month? What about when you sign on a prospective renter on the 10th? What if your tenant is a service member who is deployed or your tenant simply breaks their lease? How do you go about making the transition as smooth as possible for you, for them, and for your new tenant?
The answer is simple:
What is prorated rent?
Prorated rent is a partial collection of rent, calculated from the daily cost of living in the home.
Let’s first briefly imagine a world in which rent and utilities for the month costs $30. There just so happens to be 30 days in a fiscal month, too, which means the daily cost to live in the home would be just $1.
Therefore, if your tenant moved in on the 10th of a month, they’re expected to pay the other two thirds, or in this case, $20 of rent. Or, maybe they move in on the 20th of a month? They’d only be expected to pay for the 10 days they’d actually be living there, or a simple $10. The 15th? $15.
Use this easy formula to find your values:
Daily Rent Amount: Monthly Rent / Number of Days in Month (assume 30)
Prorated Rent Amount: Daily Rent Amount x Number of Days Lived in Property
Why should you offer a prorated rent?
There are several reasons you should offer your tenants a prorated rent. Let’s go over some of the big ones.
- It establishes you as a forthright and thoughtful landlord.
There’s no reason by law that you have to offer a prorated rent, but it sure does look good. If your tenant is aware that you’re looking out for their best interests, by you being proactive and taking the high road? That fact alone is worth its weight in gold.
You want your tenant to trust you and work with you. After all, you'll want to avoid those pesky red flags that renters are so worried about.
2. It’s much easier on your finances.
It allows you to adjust and adapt to a sudden or unexpected change in tenancy, while still allowing you to take in a full month’s rent from your tenants and rely on that income in the future. After all, you want to be able to keep track of and rely on a consistent flow of funds.
3. Prorating rent makes taking care of your taxes a breeze.
The 1040 form is what you’ll use to report your rental income for taxes and usually, it applies on a month-to-month basis (i.e. how much money did you make every month?). By prorating rent for the tenant that has left and for the tenant that is coming in, you can essentially keep these values the same, without interrupting the expected income flow. And, come tax season? You’ll be glad you did, as it makes jotting down your rental income a breeze– be sure to keep an eye on other tax-saving tips for landlords, too!
How to offer a prorated rent
Like most things in property management, it’s best to get it in writing. Or, in this case, just include it in your lease. It’s very easy to simply have the lease do all the talking for you (for prorated rent and everything else!), so here’s a few clauses you can include in your lease (and you can then explain to your tenant) in order to make prorating their rent a breeze for the both of you.
In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the assigned to periods of rent, the Rent shall be prorated as of the date of commencement or termination and in the event of termination for reasons other than default, all prepaid Rent shall be refunded to Tenant or paid on its account.
If this Lease starts or ends during a period of rental, Rent and Additional Rent shall be prorated as of such date using a 360-day year, 30-day month formula. Upon termination other than for default, prepaid rent shall be refunded, if applicable.
Landlord and Tenant agree and understand that if the Commencement Date or last day of the Term occurs on a date that is other than the first or last day (as applicable) of a month, the Rent for that month shall be prorated on a per diem basis.
These three clauses are a great way to include and explain rent proration in your lease.
Good landlord practices
While rent proration is often a great service to provide to your tenants, it’s always best to make sure you collect a full first month’s rent and security deposit first. This way you can assure that they have the funds to clear it. Most tenants who may have trouble or are willfully negligent will display problems in the first 30-60 days of renting. If you can collect a full month’s rent from them (rather than applying the proration first and only collecting a half or third) it allows you to have gained a month’s rent, rather than being stiffed on that valuable other half. Honestly, it's really never fun to run into problems with your rent collection.
Of course, you can always apply the proration to the next month after, but be sure to inform your tenants of this fact, in case they come calling about why their rent suddenly went from $1000 in the first month to $500 in the second month!
Related: Best Practices for Landlords
Quick and Easy
- Prorated rent is a partial collection of rent.
- Collect it when a tenant moves in or out during the middle of the month.
- Calculate it based on how many days the tenant has spent in the property.
- Be sure to collect a full month’s rent and security deposit first, and apply the proration later.
Related: How Prorated Rent Works for Renters
Still seem troublesome?
Tellus provides a free, fast and one-touch service for calculating, collecting and managing monthly rent, which comes equipped to handle prorated rent from the outset. Try it out or look for us on the App Store or Play Store!
Want to calculate prorated rent? RentDrop.io has a free tool for you. Check it out here!