Selling a rental property involves a few more wrinkles than selling other types of real estate. Any rent that is paid to the seller prior to the date of closing must be prorated at the closing table in a real estate rental property transaction. This means that the seller owes the buyer any rent amounts that represent the period of time from closing through the end of the rental period—usually a month.
Prorated rent is normally done through the date of closing, and it doesn't include security deposits, which can be turned over to the buyer by the seller to be held as they were before the sale. The buyer would then be responsible for the deposits and their eventual disposition based on the terms of the new rental agreement.
Key Takeaways
- When an owner sells a rental property to someone else, the rent during the month of closing is usually prorated.
- When rent is prorated, the old owner gets the rental income through the date of closing and the new owner receives the rental income for the days remaining in that month after closing.
- There are two things that are needed to determine the prorated rent: the number of days rent the seller owes the buyer and the rental amount per day.
- If you get a new tenant in your rental property, and they move in mid-month, you'll have to also prorate the month for the old tenant and the new tenant.
How To Calculate Prorated Rent
To determine the amount for the prorated rent, follow these three steps:
- Determine the number of days rent the seller owes to the buyer
- Calculate the rental amount per day
- Multiply the rental amount per day by the number of days the seller owes the buyer
For example, let's say you're the owner of a condo that you rent out to a family. The rent per month is $2,000. You decide to sell the rental property to another person, and you'll close the real estate transaction on Sept. 15.
There are 30 days in September. The rental amount per day is equal to $2,000 divided by 30 days, which equals about $67. Because the closing takes place in the very middle of the month, you as the older owner will get 15 days of rental income and the new owner will also get 15 days of rental income. At $67 per day, you each get $1,000. If you were to close on Sept. 10 instead, you'd receive $666.60 and the new owner would get $1,333.40.
Note
Prorated rent is shown as a "credit" to the buyer and a "debit" to the seller on the closing statement.
Other ConsiderationsWith Prorated Rent
Rental properties are purchased for their cash flow and overall return on investment with appreciation and tax advantages, whether they're single-family dwellings or apartments. The proration of rent at closing is only one important consideration.
Buyers should determine whether the reported rents are correct. Make sure that the rents in spreadsheets and income documents are factual. A prospective buyer of a rental property should get bank statements to verify that those are the actual rents being paid. If one apartment's rent is supposed to be $750 a month, confirm that this is indeed the amount being deposited each month.
For example, the landlord might have been letting the tenant trade services for some or all of his rent payment. Perhaps the tenant was providing cleaning and maintenance services, or maybe the tenant received an off-the-books rent reduction due to a personal relationship with the landlord. For whatever reason, the numbers will balance only when all rents included in tenant leases are deposited.
Aprospective buyermightalso inquire as to whether the seller is chargingcurrent market rates. Confirm whether tenants are paying below, at, or above what other landlords in the area are charging for similar properties. There can be real value in this area for the buyer. Some landlords are either lazy or don't like interviewing and placing new tenants so they'll avoid increasing rents for long periods of time to keep the same tenants in place.
The rents being paid can be significantly below current market rates as a result. Rents can be increased immediately upon lease expiration to change the ROI and cash flow for the benefit of the new owner.
Frequently Asked Questions (FAQs)
What is prorated rent?
Prorated rent is when one month of rent is split between two parties—either the old owner and the new owner of the rental property or the old tenant and the new tenant of the rental.
How do you calculate prorated rent?
To calculate prorated rent, take the total monthly rent amount and divide it by the number of days in that month. Take this daily rent amount and multiply it by the number of days in which you as the renter or the owner will be involved with the property. For example, if rent is $2,500 per month in September, the daily rate is $83.33. If you are the tenant and will move in on Sept. 15, you'll only owe rent from Sept. 16-30, or 15 days. Your prorated rent amount is $1,250.
FAQs
Prorated rent is used for tenants who will not be occupying a property for a full month and are responsible for partial rent. Regardless of the number of days in the month, divide the month's rent by 30. Then multiply this amount by the number of days a tenant is responsible for the rent.
How does prorated rent work? ›
This method is simple to calculate and easy to explain to tenants. Take your monthly rent and divide it by the number of days in a month. You multiply this amount by the number of days the tenant will occupy the unit.
How is rent usually prorated for purposes of closing? ›
Determine the number of days rent the seller owes to the buyer. Calculate the rental amount per day. Multiply the rental amount per day by the number of days the seller owes the buyer.
Is rent divided by 30 or 31? ›
Method 3: flat 30 days (banker's month)
This method entails dividing the monthly rent by 30, no matter how many days are in the month. In some states, like California, this is the exclusive method used to calculate prorated rent.
Why would you ask for prorated rent? ›
There are a lot of reasons why a tenant might not be able to move them right on the first. Maybe they are looking for a place on short notice, or their previous lease expired on an odd date. Whatever the reason, prorating rent can allow both the landlord and the tenant to engage in a fair deal in this circ*mstance.
What is the formula for prorated rent? ›
In order to calculate the prorated rent amount you must take the total rent due, divide it by the number of days in the month to determine a daily rent amount. You then multiply the daily rent amount by the number of days the tenant will be occupying the property to generate the prorated amount for the partial month.
What is an example of prorated rent? ›
Take your monthly rent and divide it by 30 to determine your daily rent. Then, take the daily rent amount and multiply it by the number of the tenant will occupy the unit for that month.
How do you negotiate prorated rent? ›
How should you ask for prorated rent? If you're going to ask for prorated rent, do it in writing and politely. If you are moving into a place mid-month, include in your letter how much you are looking forward to renting the apartment, and to having a friendly, fair relationship with the landlord. Then make your case.
What is a prorated expense to the seller at closing? ›
Prorated items – Items paid in arrears. At the time of closing, the seller has incurred certain expenses that have not been billed or paid at the time of closing and that the buyer will have to pay later. Typical items are real estate taxes, utility bills and interest on an assumed mortgage.
What would not be prorated at closing? ›
C A security deposit would not be prorated at closing, since it must continue to be held in trust. It would simply be transferred from the seller to the buyer.
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."
What is an example of prorated? ›
In accounting and finance, prorated means adjusted for a specific time period. For example, if an employee is due a salary of $80,000 per year, and they join the company on July 1, their prorated salary for that year would be $40,000.
Is 30% rent unrealistic? ›
However, in today's economy, more than half of American renters spend more than that, and not by choice, according to research from The Joint Center for Housing Studies at Harvard University. Unfortunately, limiting the amount you spend on rent to only 30% of your total income is unrealistic in many cases.
Is prorated rent better? ›
While the landlord is often losing money by prorating rent, prorating rent greatly benefits the renter of the space because it: Saves you money: Prorated rent means you only pay for the days you occupy a home. This saves you money because you're only paying a portion of the rent, not the full month's rent.
What does it mean to prorate a landlord? ›
Prorated rent means the rent is adjusted according to how many days a tenant stays in a rental during a month. It's a fair way for landlords to charge tenants who don't stay for the whole month. This adjustment is common when tenants move in or out mid-month.
What does it mean when a payment is prorated? ›
What is Prorated Billing? Prorated billing is a form of billing or invoicing customers based on the proportion of the monthly service that's used. In other words, prorated charges ensure that customers are billed only for the number of days that they actually used the service.
How do you prorate rent 30 or 31 days? ›
The prorated rent calculator will take your monthly rent amount and divide it by 30. California courts use 30 days to calculate daily rent, no matter what month it is.
Is prorated rent 30 or 31 days in California? ›
All prorations of rent and utilities, when applicable, will be based on a 30-day month to determine a daily rate, regardless of the number of days in the month.
