Prorating Rent for the Real Estate Investor

Do some simple math to calculate exact amounts due at closing

Real estate closing
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At the closing table in a real estate rental property transaction, any rents that were paid to the seller prior to closing will need to be prorated. The seller will owe the buyer any rent amounts from closing through the end of the rental period, usually the month. Normally, rent prorations are done "through" the date of closing.

Prorations do not include security deposits. Those can be paid to the buyer by the seller to be held as they were before the sale.

The buyer will then be responsible for the deposits and their eventual disposition based on the terms of the new rental agreement.

Proration Calculation Example

There are three calculations to arrive at the amount of the rent proration:

  1. Determine the number of days rent the seller owes to the buyer.
  2. Arrive at the rental amount per day.
  3. Multiply the rental/day amount times the number of days.

Let's do a sample calculation now. Assume that a duplex with both units rented is being sold. Rentals are $500/month for Unit A and $700/month for Unit B. The rent was paid for both units on the first day of the month of September, and we are closing on the 12th of September.

  1. 30 days in September minus the 12 days through closing equals 18 days to prorate.
  2. Rents total $1200/month, so divide by 30 days for daily rental amount of $40.
  3. $40/day rental amount times 18 days equals $720.

On a closing statement, this amount will show as a "credit" to the buyer and a "debit" to the seller.

Buying Rental Property - Other Considerations about Rents

Obviously, rental properties, from single family through apartments, are purchased for their cash flow and overall ROI with appreciation and tax advantages.  We just looked at the proration of rents at closing, but there are two really important considerations when it comes to rents.

 Buyers should determine whether the reported rents are correct.

Correct means that the rents in spreadsheets and income documents are factual. To confirm the information, a prospective buyer of a rental property should get bank statements to verify that those are the actual rents being paid. In other words, if one apartment's rent is supposed to be $750/month, confirm that this is the amount being deposited.

For example, suppose the landlord was letting the tenant trade services for some or all of the rent. 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. Whatever the reason, the numbers will balance only when all rents included in tenant leases are actually deposited.

The prospective buyer may also inquire whether the seller is charging current market rates.  In other words, confirm whether tenants are paying below, at or above what 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 just don't like interviewing and placing new tenants.  They will avoid increasing rents for long periods of time in order to keep the same tenants in place.

The result is that the rents being paid can be significantly below current market rates.  Immediately upon lease expiration, rents can be increased to change the ROI and cash flow for the benefit of the new owner.