Deciding When and How to use Prorated Rent as a Property Manager
Rental property owners and property managers can often find themselves in the position of needing to prorate rent for a tenant. Though accurately calculating prorated rent can seem daunting, real estate calculation tools and resources can make the process much more manageable for everyone involved.
To prorate rent means to calculate the amount owed based on the exact number of days a property is occupied rather than charging a lump sum for the entire month. Experienced property managers such as Martin Feinberg can decide to prorate rent when a tenant moves into a property after the first of the month or out before the month ends.
To prorate or not
Most states do not require a property manager or property owner to prorate rent, regardless of when a tenant moves in or out. When this is true it is up to the discretion of the property manager to decide whether or not they will prorate, and to determine how they will calculate the amount owed.
Some property managers choose not to prorate ever, and will instead always charge the monthly rent based on when the tenant moves in rather than on the first of each month. This allows the manager to stagger their monthly revenue, but often creates more complications when it comes to bookkeeping and tracking rent payments.
Other property managers charge a full month’s rent regardless of when the tenant moves in, if the unit was technically available on the first of the month. Similarly, they charge a full month’s rent when the tenant moves out, even if the renter gives adequate notice and leaves before the month is over.
Property managers that choose to prorate often do so as a way to keep tenants happy while stemming the possibility of poor reviews and feedback from residents. Property managers that prorate usually have an easier time filling vacancies and have less tenant turnover.
Calculating prorated rent
For most property managers and rental property owners, calculating prorated rent involves two steps:
- Step 1: Determine the daily rental rate
- Step 2: Multiply the daily rate by how many days the resident will occupy the unit
Most of the time calculating a prorated rent using these two steps isn’t complicated. The hard part is deciding how to determine the daily rental rate. There are four different options for doing so.
Determining the daily rental rate
Number of Days in a Year
Property managers can multiply the monthly rent times 12 months, then divide that number by 365 to get the daily rate. This method is most useful when signing a year-long or long term lease.
Number of Days in That Specific Month
Property managers can divide the monthly rental amount by the exact number of days in the month. This option is often used when tenants are signing a short-term or month-to-month lease.
Number of Days in an Average Month
This method requires property managers to determine the average days per month by dividing 365 days by 12 months to get 30.42 average days. Then that number is divided by the rental amount.
Flat 30 days, or a Banker’s Month
Using this formula, property managers divide the monthly rent by 30, regardless of how many days are in that month. Some states, like California, require the use of this method exclusively.
Professional property managers must decide for themselves, taking into account local and state laws and regulations, if they want to offer prorated rent rates to tenants, and if they do, which formula will work best for them and their owners. Prorating rent can help keep tenants happy but can create more work than otherwise would be necessary.