One of the first and most important decisions a new landlord or longtime landlord procuring a new investment property needs to determine is how much to charge for rent. Many variables are used to calculate how much to charge for rent each month, but leases don’t always start on the first day or end on the last day of the month. So what do you charge for rent when a tenant doesn’t stay the entire month and a tenant moves in or moves out? In this situation, a landlord needs to prorate the rent.
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What is Prorated Rent?
As stated above, not every single lease lines up exactly with the first and the last of the month. This means at some point, you’re going to need to charge less than the total amount of the monthly rent. This usually happens on the first and last month of a lease. The prorated rate for rent means you are charging for the number of days a tenant will be occupying your property during the calendar month. There are other circumstances beyond partial month occupancy in which you may be required to prorate rent as well, so understanding this simple concept will go a long way in helping you manage the finances of your real estate investment. Also, prorated rent won’t impact how much a renter will pay for a security deposit. So, how is rent prorated?
How do you prorate the rent amount due?
There are three ways to calculate the prorated rate rent.
1. Days of the Month
The first method is to calculate the daily rent cost based on the number of days in the month. Since not every month has the same number of days, the daily rent amount will differ.
Let’s say you charge $2,000 dollars a month for rent. To calculate the daily rate for rent in the month of January, you would divide $2,000 by 31. This means the daily rate for rent would be $64.52. Let’s just say the lease starts on the 8th day of the month. To calculate the prorated rent for the remaining portion of the month, you would multiply $64.52 by 7. This would give you $451.64 for the 7 days out of the month the tenant is not occupying the unit. Once you have that number, you subtract it from the total, which leaves you with a total prorated rent of $1,548.36.
- Step 1: $2,000 / 31 = $64.52
- Step 2: $64.52 x 7 = $451.64
- Step 3: $2,000 – $451.641 = $1,548.36
- Total rent for January: $1,548.36
Now, let’s look at how this same method will impact the prorated rate in the month of February, which has 28 days instead of 31. This obviously adds an extra day to 29 in a leap year.
- Step 1: $2,000 / 28 = $71.43
- Step 2: $71.43 x 7 = $500.01
- Step 3: $2,000 – 500.01 = $1,499.99
- Total rent for February: $1,499.99
2. Days of the Year
- Step 1: $2,000 x 12 = $24,000
- Step 2: $24,000 / 365 = $65.75
- Step 3: $65.75 x 7 = $460.25
- Step 4: $2,000 – $460.25 = $1,539.75
3. Flat Monthly Rate
Used exclusively in California, the flat monthly rate is the third method to calculate prorated rent.
To calculate the prorated rent by a monthly flat rate, simply dividing your monthly rent charge by 30 days (no matter the month), then multiply the total number of days the tenant isn’t occupying the rental unit. Using the average month of 30 days simplifies the process for both tenant and the landlord.
- Step 1: $2,000 / 30 = $66.66
- Step 2: $66.66 x 7 = $466.62
- Step 3: $2,000 – 466.62 = $1,533.38
- Total rent charged for the month: $1,533.38
Pro Rate Tips
- Tip 1: Using a spreadsheet can allow you to build these equations and automatically calculate the prorated rate by just plugging in the numbers.
Tip 2: While the practice of prorating rent is standard across the country, the rules that govern property management vary by both state and municipal laws and ordinances. In order to make sure you’re acting in accordance with the local laws, you can consult a local lawyer or conduct your own research.
Real estate laws are a labyrinth of municipal, state, and federal laws that are difficult to navigate even for those with extensive knowledge of the industry. Expertise doesn’t always transfer from location to location and there’s often a learning curve for those entering new markets. It’s always best to seek professional assistance when entertaining a new market.
Pro Rate Examples
1. Moving in and Moving Out
If substantial repairs to the rental unit are required that will inconvenience the tenant for a few days, you may need to prorate rent for the number of days work takes place. Substantial repairs and renovations would be things like remodeling a bathroom or kitchen, repairing the floors, and repairing pipes. Anything that would give your tenant limited use of their rental unit during the construction.
3. Rent Credit
You can also use the daily rate as a guide for rent credit for how much of the property is affected by work done or what the tenant is unable to use for x amount of days. If the daily rate is $66.66 and the tenant is unable to use 10% of the property due to malfunction you can use 10% of the daily rate, which the credit issued could then be offered as $6.66 a day. Sometimes it is easier with a rent credit to round up to a whole number that seems fair. Say this tenant was affected for 11 days instead of crediting $73.26 an even $75 rent credit would likely seem fair.
Ziprent Prorated Rent Calculator
Managing a rental property can be time-consuming. Newcomers to the real estate industry often assume managing a property is just as simple as finding a tenant, renting out the property, and forgetting about it until it’s time to find a new tenant. If you don’t want to spend too much time on tasks like prorating rent, there are other options. You can hire a property management company like Ziprent to handle time-consuming jobs like figuring out how to prorate your incoming tenants’ rent correctly.
Owning a rental property requires hundreds of tasks occupying your time every day of the year. There is no day off when managing a business that is open 24 hours a day. Prorating rent is just one of many tasks that will take up a percentage of your workday and hiring a company like Ziprent will allow you to complete these tasks more efficiently.
The Pros and Cons for Prorating Rent
As long as you are primarily working with long-term leases, the method you choose to use shouldn’t have too much impact on your bottom line. Using a daily rate based on the total number of days in the year instead of monthly means you would charge less in January, but more in February than if you were to use the monthly method. That is something to consider if you’re doing mostly short-term leases. With short-term leases, there tend to be more move-in dates in the middle of the month making a prorated rent necessary for both the first month’s rent and the last month’s rent. Short-term rentals tend to have more vacancies than long-term. This means you won’t always be collecting a full month’s rent.
The Challenges with Tenant Relations
Whichever method you decide to use, you will want to communicate the amount and the method to your tenants in the lease. This will protect you against any claims in a lawsuit in regard to how much you are owed. Once you have picked one method and included it in your lease, you should stick to that method with the tenant. Decreasing confusion can help protect you and your business from potential liability and help you collect any disputed charges.
Managing a rental property is a long-term investment and every day a rental unit is vacant is lost revenue that cannot be recovered. Every month a unit is rented under the market rate is a month of lost revenue you will never be able to recover. Using a property management company will give you access to the tools and the data as well as professional assistance that will help ensure you can maximize the profits from your long-term investment and allow you to invest in the future growth of your own business.
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