How Does Prorated Rent Work in a Real Estate Transaction?

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.

How To Calculate Prorated Rent

To determine the amount for the prorated rent, follow these three steps:

1. Determine the number of days rent the seller owes to the buyer
2. Calculate the rental amount per day
3. 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.

Other Considerations With 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.

A prospective buyer might also inquire as to whether the seller is charging current 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)