Rental Income Advance

October 26, 2021
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What is a rental income advance?

A rental income advance is any amount of money landlords accept before the billed period. The rental income otherwise collected over time is paid in a lump sum up front. Since the value of today's money is worth more than the value of future money, this could be a smart move.

Suppose you're collecting $1,500 a month in rent and you have 12 months left on the current term. You've done a good job of screening your tenant and you expect to collect $18,000 over the course of the next year. Advancing your rental income is the process of getting all or part of that $18,000 today.

One thing to keep in mind: Getting your future rent today may require you to ask an accountant whether you should account for revenue based on the cash basis or accrual basis. Either way, for tax filing purposes, you'll likely need to recognize the rent in the year you've received the money.

How do rent advances work?

Landlords may accept rent in advance from their tenants or from a third party.

Tenants can pay advance rent

Landlords may ask the tenant to pay the first and last month of rent as a condition of signing the lease. Alternatively, Tenants sometimes offer to pay more than one month of advance rent in exchange for a discount.

Some of the benefits of doing so include:

  1. Eliminating the pain of collecting rent each month. Collecting rent is a hassle but it must be done every month. Tenants who pay rent months in advance can greatly reduce landlord stress.
  2. Reduce the risk when tenants have a short or no rental history. Some tenants may not have a long rental history so it's hard to verify that the tenant will always pay on time. Having the tenant pay rent in advance reduces the risk of delinquency.

Some of the drawbacks include:

  1. Legal guidelines may need to be observed. In many states and locales, there are laws that govern whether or not rent can be collected in advance. Additionally, some states regard rent advances also as security deposits.
  2. Accounting and taxes may become more complex. The IRS has guidance on rental income advances and you may need to report the unearned rent as income on your current year's taxes.

Third parties can advance rent

Instead of asking the tenant to pay rent in advance, the landlord can approach a third party financing company and request a lump sum for their expected lease receivables. The landlord would either receive a discounted payout or need to pay fees (eg. closing, origination) to access the service.

Some of the benefits of doing so include:

  1. Not taking on more debt or bringing on additional equity partners. Depending on the third party financing company, the rent advance may be revenue-based financing instead of equity or debt financing. This means you get access to cash without diluting yourself.
  2. Writing off the fees as a non-operating Interest Expense. Check with an accountant to see if the fees you pay on your financing can be tax deductible. Your full lease contract can be recognized as revenue allowing you to continue qualifying for the same traditional financing options. This means you get more liquidity without compromise.

Some of the drawbacks include:

  1. Needing to pay a fee. Your fee will vary based on your operational history and risk profile. If you don't have a specific reason to use the money, rental income advances may not be right for you at this time.
  2. Not getting enough money. In some cases, you may want to or need to borrow more than your lease contract value. As a result, landlords may still need to use supplemental financing in addition to the rental income advance.

Is my rent guaranteed when I get an advance?

Typically speaking, rental income advances don't guarantee your income. This is because the money is unearned at the time the income is advanced. However, there are many fantastic rent guarantee options that can complement the rental income advance financing. Ultimately, this guarantee can be avoided if landlords screen the tenant carefully.

Nophin lets you get your rent upfront

Nophin is a third party financial services provider that allows landlords to advance their future rental income to pay for today's expenses and growth. Depending on your circumstances, this can be an incredible supplemental financing option that lets landlords access liquidity and get the money that's already yours. Use Nophin to get your rental income advanced today!

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Please note: Nothing above should be construed as legal, investment, tax, nor financial advice. This content is for informational purposes only. Consult a lawyer and/or an accountant if the above is right for your personal situation.

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