As a real estate investor, property manager, or rental agent, you know that every day a rental property is not monetized has a profound effect on the property’s cash flow and the financial bottom line. Thus there are times when it makes sense to think about rental income by the day, rather than by the month or lease term. In these cases, you’ll want to use an accurate method for calculating partial or prorated rent payments.
What is the purpose of calculating prorated rent?
The purpose of calculating prorated rent is to provide additional flexibility both at the beginning and end of the rental period. This can help you minimize vacancies and be more responsive to tenant requests while ensuring that the rental property you manage is optimally monetized.
What other transactions are commonly prorated?
Prorated calculations are frequently used in real estate sales to align insurance, property taxes, and interest payments with the closing date for the transaction. Knowing how to calculate a prorated rental payment offers you options that can help you during the marketing and onboarding process and again at the end of the rental term.
What is prorated rent?
Prorated rent is a partial payment used to compensate for an occupancy period of less than a month. It can be calculated in a variety of ways and serve a variety of purposes. The following circumstances may require you to calculate the prorated rent for a property you represent:
- An existing tenant needs to stay in the unit for a few days past the end date of his or her current lease.
- A new tenant is arriving in town prior to the beginning of the lease term and has asked to take possession of the rental home a couple of days early.
- An existing tenant has had to move out of the property due to damage from a recent storm. Loss of rent insurance coverage is paying for two weeks during which repairs will be completed, so the tenant will only be responsible for the remainder of the month.
- If a tenant is providing services like lawn maintenance or on-site building management in exchange for a portion of their rental payment.
- If you have chosen to rent out a property short-term to provide cash flow during a period of extended vacancy.
As you can see, there are a variety of times during the tenancy when the ability to prorate rent can be a valuable tool, allowing you to better negotiate with tenants and more consistently monetize your property.
How to calculate prorated rent
There are a variety of ways to calculate prorated rent payments. Your choice may be dictated by your own financial goals or your local or state rules and regulations. Be sure to check with your real estate attorney to determine what method of prorating is required in your market.
In addition, it is important to provide a clear explanation to your tenant of the way in which your prorated rent is calculated. If you are constrained by local law to use a particular calculation method, make that part of the written communication you provide along with the prorated rent statement or include a section explaining the method within the body of your rental agreement.
In addition to providing information about the way in which you’ll calculate the prorated rent, you may want to provide information about the way that you’ll round up during the calculation. In general, you’ll look at the first three decimal places and round up or down based on the third decimal point. For numbers from five through nine, you’ll round up, while for numbers from zero through four you’ll round down.
It may seem like overkill to go into detail about the way in which your calculations are arrived at, but as you will see, different styles of prorated calculation can result in different outcomes, sometimes by a few pennies and other times by several dollars. When it comes to money, more information is better than less and can head off misunderstandings and frustrations.
Calculating by the year
Calculating by the year looks complicated but it is probably the easiest and most straightforward way to calculate prorated rent. Calculating by the year involves determining the amount of daily rent in a year then multiplying that number by the number of days of occupancy within a given month. Here’s how it works:
A new tenant wants to move in five days early, on October 27th.
(October 27, 28, 29, 30, 31 = five days)
The monthly rent for the home is $1500. To calculate the daily rental amount, start by multiplying the monthly rent by 12 months ($1500*12=$18,000). Then divide the sum by 365 days ($18,000/365=$49.3150684932 rounded up to $49.32) to find the daily rental amount.
Now multiply $49.32*5 days to find the prorated rent amount = $246.60.
Calculating by the specific month
Calculating by the month is very similar and involves calculating based on the month in which the rent is being prorated. Returning to our previous example, October has 31 days. Thus:
To calculate the daily rental amount for October, divide the monthly rent by 31 days ($1500/31=$48.3870967742 rounded up to $48.39).
Now multiply $48.39*5 days to find the prorated rent amount = $241.95.
Let’s see the difference with a shorter month, February.
In a non-leap year, you’ll divide the monthly rent ($1500) by 28 days, then multiply the resulting daily rent ($53.5714285714 rounded up to $53.57) by five days to find the prorated rent amount for February = $267.90.
Calculating by the average number of days in a month
In order to keep things as simple as possible, some prorated rent calculations are based on the average number of days in a month. This is calculated simply by dividing 365 by 12 to arrive at 30.4166666667 rounded up to 30.42. Thus you can use our earlier example and do the following:
Remember that rent to income ratio is a single criterion to consider when screening potential tenants. An applicant with a 35% rent to income ratio and a stellar record of on-time rent payments from a past landlord is certainly preferable to one with a 25% ratio who is habitually late with the rent or has a credit history filled with late payments.
In the event that a renter’s rent to income ratio is higher than you would prefer, you have options for helping them to qualify for the property. These could include the following:
Divide the monthly rent by 30.42 ($1500/30.42=$49.3096646943 rounded up to $49.31).
Multiply $49.31 by the number of prorated days to arrive at the prorated rent ($49.31*5=$246.55).
As you can see, this allows you to arrive at a number similar to calculating by the year.
Calculating with 30-day or Banker’s month
In order to keep everything as even as possible, you may choose to use a 30-day or Banker’s month calculation for prorated rent. This is calculated as follows:
Assume a 30-day month in all cases and divide the monthly rental amount by 30 to arrive at a daily rental calculation ($1500/30=$50).
Multiply the resulting daily rent by the number of days you’re prorating.
In our example, that means ($50*5 days = $250).
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Is one calculation method preferable?
The calculation method is dependent first on the rules and regulations governing prorated calculations for your market. If there is no law on the books to define the method of prorating, you’ll want to talk to your attorney or to other property management firms or rental agents in your market to determine common practices for your area.
For example, in California, it is standard practice to use Banker’s month to calculate prorated rent. In Texas, it is customary to use the current month calculation. Some markets may vary from city to city as well. A thorough grounding in landlord-tenant law for your market will help you identify the strategy that makes the most sense for your rental property.
One other thing to keep in mind is that we currently live in a world where information is shared both online and in person. Online reviewers may point out what they perceive as unfair or confusing practices. That’s why it is important to provide clear information throughout the process.
Are landlords allowed to charge for days when tenants are not in residence?
Yes, generally speaking, as a landlord, property owner, or rental agent you are allowed to begin the rental term only on the first of the month and end it only at the end of the month following the final date of occupancy. However, in order to provide better tenant services, and to provide flexibility that can benefit you as well, it’s a good idea to build some wiggle room into your process through prorated rent payments.
One exception is if you have a tenant who has reached the end of his or her lease and asks for a month-to-month lease agreement until finding a new home. In that case, you may want to consider adding a clause into the lease extension requiring a full month’s rent for each of the months of additional occupancy. Since you are already taking the risk of renting with no long term agreement in place, you’ll benefit from the extra security of knowing that you can expect a full month’s rent for each month of the extension.
What if a tenant asks for prorated rent to reflect the move-in date?
In many cases, a rent term, and thus the rent payment, starts on the first day of the month, even if the tenant cannot take possession on that date. However, it’s a good idea to maintain some flexibility and take into consideration the tenant’s preferences in regard to the start date.
For example, say you’re working with a potential tenant who is relocating to your area and won’t arrive until the middle of the month. If the tenant is well-qualified and requests rent prorated to the middle of the month, it might be in your best interest to forgo the first 14 days of rent payments and prorate the first month’s rent to his or her arrival on the 15th.
Requests for prorated rent should be submitted in writing and should be reflected either in the rental agreement itself or in an addendum. There you should outline the terms and conditions of the prorated rent, including the date of occupancy, the amount of prorated rent that you’re charging, and the way in which it is being calculated.
Your decision regarding prorated rent will depend, in large part, on the amount of demand you’re experiencing during the marketing process. If you have a number of potential tenants, you may be able to set your own limits around the beginning of the rental term. However, if your rental property has been on the market for a while, you may want to be more flexible in order to get it filled.
Of course, it is easier for you as a rental agent, landlord, or property manager to maintain a fixed schedule for move-ins, move-outs, and rental terms. However, flexibility can be an important part of bringing in a well-qualified tenant up front and retaining that tenant long-term. That’s why it is in your best interest to make adjustments as needed and bring in compensation for those adjustments through prorated rent payments.
RentSpree offers a host of tools and resources designed to help you make better decisions at every step of the rental process, from the initial application to the move-out date. From calculators to screening services, to transaction management and more, you’ll find everything you need here.