Prorated Rent: How and Why You Should Calculate It
For landlords, maximizing profitability is one of the most important things about renting out a property. And a big part of that is minimizing vacancy times.
So, if you want to maximize your profits, it’s better to be flexible to accommodate tenants who wish to move in the middle of the month, or who want to add some extra time to their lease before moving out. In such cases, you can charge tenants only for the days they actually occupy your unit.
This means you’ll ask for a partial rent payment or prorated rent.
Let’s talk about this more.
What is Prorated Rent?
Prorated rent is the rent payment you charge a tenant based on the number of days they occupy your unit, based on the monthly rent. Instead of charging your tenant a daily or weekly rate (which is usually more expensive), the monthly rent is prorated per day. In other words, the percentage of the month they occupy your unit is the percentage of the monthly rent they would pay.
Prorating rent is a fair and transparent approach that ensures landlords and tenants are treated equitably. It accounts for the specific duration of a tenant’s occupancy, preventing overpayment or underpayment of rent. Plus, it allows you to accept tenants in the middle of the month and then set a regular rent due on the first day of their first entire month. This means you can have consistent billing across all of your properties.
When to Prorate Rent
Should rent be prorated during moving in, moving out, or both? Well, in most states, landlords are not required to prorate the rent, and there’s no legal reason that your monthly payment should always be on the first day of every month. But it’s essential to check with your local and state regulations if it’s required. Otherwise, it’s up to the landlord’s discretion.
There are two main scenarios when landlords typically prorate rent: when a tenant moves in or out of the rental property in the middle of a billing cycle.
If you have a tenant who wants to move into your property before the start of the month, it might make sense to prorate the rent. For example, let’s say the tenant’s move-in date is on the 25th in their executed contract, but they ask to move in a week earlier.
The property is ready, so what should you do? You can shorten your vacancy period and offer prorated rent for the extra week, rather than having to alter your entire contract.
When your tenant decides to add extra days or weeks at the end of their tenancy, prorating the rent helps you accurately calculate the tenant’s financial responsibility for that extra time.
For instance, let’s say they were originally meant to move out on the 1st. If they ask to extend to the 20th, you would prorate the rent by considering the number of days they occupy the property for that month (20 days out of 30 days).
How to Calculate Prorated Rent
If you’re planning to charge prorated rent, it’s vital to establish a prorated amount with your tenant. That’s so you’ll both be on the same page when it comes to the rental payment.
There are four ways to calculate prorated rent:
#1 Number of Days in a Year
(rent x 12 / 365) x number of days occupied
With this formula, you multiply your monthly rent by 12 months, then divide that number by the number of days in a year (365), giving you the daily rate. This formula is more applicable when signing a year-long lease or rental agreement.
For example, if your tenant moves in on the 19th day, they’ll occupy your unit for 13 days. Let’s say your monthly rate is $1215. The calculation will look like so:
$1,215 x 12 = $14,580 / 365 = $39.95 daily rent
$39.95 x 13 = $519.35 prorated rent
#2 Number of Days in That Specific Month
(rent / days in that month) x number of days occupied
If you’re using this formula, divide the monthly rental amount by the number of days in that month of rent. Note that different months will yield different results for daily rates, depending on whether it has 28/29 days, 30 days, or 31 days.
For example, if your tenant moves in or moves out in February, then the calculation will be:
$1,215 / 28 = $43.39 daily rent
$43.39 x number of days occupied = prorated rent
#3 Number of Days in an Average Month
(rent / 30.42) x number of days occupied
This prorated calculation uses the monthly average days by dividing 365 days by 12 months, which equals 30.42 average days. Here’s what it’ll look like
$1,215 / 30.42 = $39.94 daily rent
$39.94 x number of days occupied = prorated rent
#4 Flat 30 Days
(rent / 30) x number of days occupied
Flat 30 days, also known as Banker’s month, entails that you’re dividing the monthly rent by 30, regardless of how many days there are in a month. In some states, like California, landlords are required only to use this method when calculating prorated rent amounts. Here’s a sample:
$1,215 / 30 = $40.5 daily rent
$40.5 x number of days occupied = prorated rent
Maximize Your Profits By Prorating Rent
Prorated rent payments are fair to both you and your tenant. It helps make your tenants feel like they’re not overpaying you for their stay, and you get your money without wasting days of vacancy that could otherwise have been avoided.
Remember, choosing which method to use should come down to finding the perfect balance between getting an increased rental profit and the impact on tenant relations.
If you need help managing your properties and ensuring you don’t get lost in every prorated transaction, our team can help. We are a team of professional property managers in Metro Detroit, and we can help bring more money into your pocket with your rental properties. Contact us today!