How to Prorate Rent the Right Way

In a perfect world, tenants would take occupancy on the first day of the month and leave on the last day, thereby eliminating the need to calculate the prorated rent the tenant would owe when they move in or out mid-month.

prorated rent calculatorWhat is prorated rent?

The need to compute prorated rent arises when a tenant’s lease does not start on the first day of the month. It is also necessary when the tenant’s lease does not extend to the end of a month or when they move out before the end of the month. This will often occur when the tenant is on a month-to-month basis rather than a lease. Short-term rentals can also necessitate prorated payments.

While it is obviously more desirable to have your tenants on full calendar month cycles, you can agree to flexible move-in dates while still keeping consistent rent due dates with the use of pro rata rent. 

If you have a qualified applicant who wants to move in as soon as possible, it doesn’t make good business sense to risk losing a desirable tenant by asking them to wait a week or even a few days until the first of the month. You would also be losing that prorated rent money in the process. Every day you do not collect rent, your cash flow and financial bottom line are adversely affected.

When you prorate rent, be sure to collect the following month of full rent as well, plus a refundable security deposit. Doing this improves your cash flow and also reduces the risk that you’ll attract a tenant who only pays for a partial month, then stops paying the rent entirely.

Unfortunately, how to prorate rent payments is something many newcomers to property management, as well as many tenants, do not understand how to do. Knowing how to calculate prorated rental payments offers you options that can help you during the marketing and onboarding process and again at the end of the rental term.

 
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What is the correct way to prorate rent?

Most property managers want all rents due on the first of each month, so the question becomes, how do we figure out what amount of rent is due to accomplish that?  In other words, what is the right way to prorate rent?

At move in, most companies have each new tenant pay the first month’s rent and the entire security deposit, which is usually equal to one or two month’s rent. If the rent is $2,000.00 and the deposit is $2,000.00 then the tenant must pay $4,000.00 to get the keys.

If the tenant moves in on the first day of the month, there is no computing to do. Each month thereafter, the tenant will pay $2,000.00. But if the tenant moves in on the 15th, the prorated rent would be calculated from the 15th to the last day of the month. It is quite easy to figure out as long as you stick to one of the four methods listed below. And it is always a good idea to specify in the lease agreement how the prorated rent is calculated to avoid misunderstandings between the landlord and the tenant.

Method 1: Number of Days in the Year

This is the most accurate way to prorate rent when dealing with a year-long lease. Calculating by the year involves determining the amount of daily rent in a year then multiplying that number by the number of days of occupancy within a given month. Here’s how it works:

To calculate the daily prorated rent based on the number of days in the year, multiply the monthly rent by 12 months, then divide that number by 365 days:

  • $2,000 monthly rent times 12 months = $24,000 ÷ 365 days = $65.75 daily rent
  • Multiply the daily rent by the number of occupancy days: 15 days @ $65.75 x 15 days = $986.25 prorated rent

Method 2: Number of Days in an Average Month

There are 30.42 days in the average month. This is calculated by dividing 365 days in a year by 12 months: 365 days ÷ 12 months = 30.42 days.

To calculate the prorated rent based on the number of days in the average month:

  • Divide the monthly rent of $2,000 by 30.42 days: $2,000 ÷ 30.42 = $65.75 daily rent
  • Multiply the daily rent by the number of occupancy days: 15 days @ $65.75 x 15 days = $986.25 prorated rent

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. 

A bankers month assumes that every month in the year has 30 days. To calculate the prorated rent using a bankers month:

  • Divide the monthly rent of $2,000 by 30 days: $2,000 ÷ 30 = $66.66 daily rent
  • Multiply the daily rent by the number of occupancy days: $66.66 x 15 days = $999.90 prorated rent

Method 4: Number of Days in The Year

To calculate the daily prorated rent based on the number of days in the year, multiply the monthly rent by 12 months, then divide that number by 365 days:

  • $2,000 monthly rent x 12 months: $24,000 ÷ 365 days = $65.75 daily rent
  • Multiply the daily rent by 15 occupancy days: $65.75 x 15 days = $986.25

Remember to advise your tenant of the method you will be using to calculate the prorated rent at the time you agree to their shortened month.

Is prorated rent legal?

Although it’s neater to begin a lease on the first day of the month and end it on the last day of the term of the lease, life can be messy and circumstances might dictate otherwise. There are no laws that prevent prorating rent or that prohibit a tenant from moving in or out in the middle of the month. This freedom creates flexibility that can reduce vacancies, aid in cash flow and help with tenant retention.