How to Calculate Prorated Rent? Best Practices and Expert Tips
It’s only in a perfect world all tenants move in on the first day of a month and move out on the last one. It’s this ideal reality where tenants are remarkably tidy and never late paying their monthly rent. It is the kind of reality where they don’t own pets and don’t ask you to paint walls. What a nice world to live in, huh? Sure, but there’s a problem: this world does not exist. In real life, things usually require a little effort.
As a landlord, you sometimes have to be a psychologist (when convincing tenants to stop midnight house parties), a lawman (when explaining your right to keep security deposit) and even a mathematician (when calculating prorated rent). And unless you are a sucker for math, you’ll find the last role the most annoying.
But there is good news: I have researched the topic A to Z and prepared a detailed guide on how to prorate rent for newbies. By the end of this article, you’ll master the skill and get ready to pass your knowledge to others.
What does prorate rent mean?
When new tenants move in on the first day of a month, there are no calculations to make. You simply ask them to pay for the upcoming month, add the amount of security deposit, and this is it. However, if your tenants move in mid-month, they don’t owe you a full monthly rent. And it is the situation when a prorated rent calculations come into play.
As a landlord, you have to define how much money do renters owe you based on how many days are left in the current month when they move in.
Why do you need to calculate prorated rent?
First and foremost, it’s fair. If you are an ethical person (and I know that you are), you wouldn’t want to charge more than you should. That’s why you need to prorate rent and ask tenants to pay exactly as much as they have to.
Since long-term rent is usually cheaper than daily, it won’t be fair to ask tenants to pay day-by-day rate till the beginning of the new month. Neither it would be right to charge tenants for 7 months of rent if they only need your place for 6.5 months.
What’s more, there is a legal aspect involved. Here is what a real estate attorney Brian Pendergraft has to say in this regard:
Making rent due on the 1st is in the best interest of the landlord. Landlords can do this by prorating rent for the first month if a tenant does not move in on the first. Landlord-tenant courts are accustomed to the bulk of ‘failure to pay rent’ cases being filed early in the month. Judges, in their turn, are accustomed to seeing rent due on the 1st. It makes it easier for them to do the math for particular notice requirements that a landlord may be required to give.
Brian Pendergraft, Real Estate Attorney and Broker
How to calculate prorated rent?
As a rule, landlords choose one of the two methods – calculation by the number of days in a month or by the number of days in a year. Both alternatives have their pros and cons and deserve to be considered in detail.
By the number of days in a year
To use this method, one needs to multiply monthly rent by 12 to get the total yearly rent amount. Then divide this sum by 365 (or 366 if it’s a leap year). This will be the daily rent a tenant is supposed to pay. The last step is to multiply this daily rent by the number of days a rental unit will be occupied.
Let’s say a tenant wants to move in on the 17th of June. Your apartment costs $1,500/mo. Since the number of days in June is 30, it means a tenant should pay for 14 remaining days. Here is how the calculations will look like this: (1,500 x 12) / 365 x 14 = $690.
Pro: The most accurate option if dealing with year-long rental agreements.
Con: Some tenants find this method confusing.
This method works best because it does not allow either side to try and use variations in the length of months to their advantage. I have used this method as both a renter and a landlord as it’s nearly impossible to argue with and simple to calculate.
John Liston, Strategy and Operations Manager at All Set.
By the number of days in a month
This method is so simple that even a 5-year-old would be able to understand it. Take your monthly rent and divide it by the number of days in a particular month. Then multiply the result by the number of days a rental unit will be occupied.
Let’s take the same case with a tenant willing to move in on the 17th of June in a rental that costs $1,500/mo. With a monthly approach, the calculations will look as follows: 1500/30 x 14 = $700.
Pro: Exceptionally accurate and easy to understand.
Con: Months are not equally long, so the sum will be different for February and July.
Which one is better?
It is up to a landlord to choose which method to use. As a general rule, landlords use ‘the number of days in a year’ approach for rental agreements of a year and more and ‘the number of days in a month’ approach for rental agreements shorter than 12 months.
However, it is believed that tenants prefer a ‘number of days in a month’ option as they clearly see what they pay for at the moment of paying. What’s more, this approach tends to be slightly cheaper for them.
No matter which method you decide to use, don’t forget about utility bills. Unless you are renting out with ‘utilities included’, use the same logic to find out how much money should your tenants pay for utilities when moving in or out mid-month.
Which tools can you use to ease the process?
As you can see, both options are relatively easy and don’t require a degree in Applied Maths. However, if numbers are not your strong point, there is an even easier alternative. It turns out, there are online calculators and even mobile apps to help you prorate rent. Additionally, collecting rent online can drastically simplify the whole process.
Prorated Rent Calculator by Rentvine
This online calculator can help you prorate rent for your tenants. All it takes is to indicate the amount of monthly rent, specify rent due date and move-in date. The calculator will do the rest of the job for you.
Prorate Calculator Pro
This mobile app allows you to calculate prorated rent quickly and easily. It’s possible to make calculations by a number of days in a month or a number of days in a year taking into account utility bills. Might be especially useful for those who manage a number of properties and need to prorate rent every now and then. Download this app on App Store.
Summing Up About Prorated Rent Calculations
To help you digest all the information mentioned above here is how to prorate rent in a nutshell:
- Use ‘by the number of days in a month’ approach when prorating rent for leases shorter than one year and ‘by the number of days in a year’ for leases of a year and more.
- Make sure to include utility costs if you are not renting out with ‘utilities included’.
- Check online tools to help you calculate prorated rent correctly.
Preparing rent calculations are easier than they sound. Especially, if you are familiar with all the tricks and tools described in this article. Now you know all the ins and outs of the question and are ready to educate others on the topic.