Everything you need to know about insurance basics, like coverage types, limits, cost and more.
Prorating Rent Tips
Landlords and property managers frequently need to prorate rent for their tenants. But if a tenant is planning to move out on May 20, would you know how to do the math?
What if a tenant approaches you and wants to pay off the remainder of their lease, which expires in nine months and four days? Do you know how to make that calculation? What about prorating long-term leases? If your answer isn’t a resounding “I know how to do that!” that’s where we come in. Take a look at our prorating rent tips to help ensure you’re calculating prorated rent correctly.
How to Calculate Prorated Monthly Rent
Even if it seems like rent payments should be made every 30 days, the actual amount due can differ one month to the next because of the total billable days in a given month. And the number of days in the year can become a factor when prorating annually. Be sure that your lease defines how rent will be prorated. That way, your tenant will know what to expect.
Prorating is a pretty simple process, really. But to start, you’ve got to answer a few questions to make sure you’re getting the math right. Let’s begin with an easy example. Suppose you’re going to be charging your tenant from May 7 (their move-in date) through the end of the month. Let’s assume that monthly rent is charged at $3,000 per month and it’s due on the first of every month.
Here’s what you’ll need to do to calculate May's prorated monthly rent:
- Determine the total number of days in the month you’ll be prorating. In this case, May has 31 billable days.
- Determine the rent-per-day rate. Divide the total monthly rent by the number of days in the month you’ll be prorating.
- Determine the total number of billable days the tenant will be paying for.
- Multiply the per-day rate by the total number of billable days.
- $96.77 x 25 = $2419.36 is the total billable prorated amount due.
Prorating Long-term and Leap Year Rental Agreements
Getting the numbers right on long-term contracts may be more difficult when those agreements extend across entire years, but end in the middle of a month. And if a scheduled rent increase is going to occur at the lease’s anniversary, you’ll have more work to do to factor in the new rental price. Take a look at how to manage prorating long-term and leap year rental agreements:
Consider this scenario: Your tenant wants to pay the entire amount due in for an 18-month lease in one lump sum. The lease starts on the move-in date August 15, 2019 and expires on February 15, 2021. Rent is $3000 per month, but on September 15, 2020, it’s scheduled to go up to $3200 per month. Because February of 2020 includes an extra day for leap year, you’ll need to divide the full monthly rent by 29:
- Determine the total number of billable days in August, 2019:
- Determine the total number of billable days in February, 2020 (a leap year).
- $3,200 ÷ 29 = $110.35 is the daily rent rate.
- 15 x $110.35 = 1,655.25 is the total billable prorated amount for February.
Now that the hard part’s out of the way, just count up the full months that remain on either side of the lease anniversary, and multiply that number by the active rental price. Then add that total to the two prorated total billable amounts, and there you go!
Remember that if your agreement terms include a scheduled rent increase, you may be entitled to collect more funds for the security deposit. As always, check with your real estate lawyer and be sure you’re operating in accordance with state laws and local codes when dealing with security deposits.
Insuring Your Real Estate Investments
As you’re fine-tuning your business objectives, and managing rental rates, be sure to also contact your American Family Insurance agent and review your coverage. Because you’ve invested so much of yourself into your rental property, you’ll find real peace of mind by insuring your real estate investments carefully.