The term “prorated” comes up often in rental agreements because rent is usually paid on a monthly basis, yet tenants may move in or out and landlords may rent properties during different times of the month. Thus, a simple calculation is used to determine how much rent should be paid for part of the month. However, prorating can get complicated because there are a few different ways to calculate a daily rental rate. This post will provide everything you need to know about prorated rent.
Prorated Rent Calculator
The word “prorate” comes from the term “pro rata,” which means equal portions. When it comes to rental payments, these equal amounts are based on units of time, mainly the number of days in a given month. However, the 12 months in our calendar don’t have the same number of days. So, even though “prorate” means equal portions, calculating those equal portions can vary by month, and also by how a landlord chooses to prorate rent.
Why Understanding How to Prorate Rent Is Important
It’s important to understand how to prorate rent because money is on the line and it can impact the net amount you end up paying in a year for a rental if you’re a tenant, or how much you’ll earn as a landlord.
For example, let’s say you’re a tenant and you learn that you have to move out because your landlord sold the property where you live. Or, you’ve lived somewhere for over a year, and now you’re on a month-to-month lease, and you want to move. However, you have to give your landlord 30-days notice before you do.
It can take time to find a new rental unit, so you start looking. If you have to be out of your rental by a certain date, you don’t want to wait until the last minute to find a place because you have a strict move-out date. Or, suppose you want to find a place that’s less expensive than where you live now, so you want to jump on a place if the right unit comes up within your price range.
Suppose you find the perfect place, but it’s available right now. However, you have to give 30-days notice on your old place before you can move. That means, if you find a new place to live mid-month, let’s say on 15th, you would give your old landlord 30 days notice, so you’ll still have to pay a half a month’s rent on your old place the following month to fulfill your 30 days notice obligation. Prorating comes in when determining how much more money you owe your current landlord to fulfill that 30 days notice obligation.
If you’re in a competitive rental market, and you find the perfect place, but it’s available right now, you don’t want the new landlord to rent it to someone else because you’re still obligated to remain in your old place for 30 days.
In this case, to secure the new place, you might strike a deal with the new landlord by saying you’ll take the new place in two weeks. If they agree, then you’ll prorate your first month’s rent because your lease will start mid-month vs. the standard first of the month.
Paying Double Rent
As a tenant, it’s important to understand what the exact prorated rental rate will be because, in this scenario, you will technically be paying rent on two places at least for part of the month: the remaining days on your old lease, and part of the first month on your new place. Here you were thinking you’d be saving money on rent, but because of how the timing worked, you end up paying a little more. These situations are often out of your control, but what you do have control over is negotiating with your new landlord and factoring in prorated amounts when estimating how much rent you can afford.
The Cost of Vacancies
Landlords also have to be cognizant of how prorated rent works from an opportunity-cost perspective. For example, suppose you have a rental on the market that’s listed for $2,600 per month. One way to calculate your prorated daily rent would be to divide the monthly rent by 30.42. That’s 365 days in the year divided by 12 months. So, your daily rent on the unit is $85.47.
Every day that your unit is vacant, you’re losing $85.47. If the unit is vacant for three weeks, that’s a loss of $1,794.87. If you amortize that loss over one year, it’s equal to losing $145.82 per month.
It’s possible that your rental is remaining vacant because it’s priced a little too high. If you had priced it at $2,500 and it rented right away, you would have been in a better position financially in that first year than having it stay vacant for three weeks in hopes you could be $2,600 per month.
Thus, understanding the daily prorated rent amount of your property can provide clarity into what’s at stake if a unit stays vacant for too long.
How to Prorate Rent
How to calculate prorated rent is a question that comes up for both landlords and tenants because there are a few different ways to do it. Some months have 31 days in them, others have 30 days, and in the case of February, there can be 28 or 29 days.
Here are four ways to prorate rent:
Prorated Rent Method 1: Calculate the daily rental rate by dividing the monthly rent amount by 30 days, also referred to as a “banker’s month.”
This is one of the simplest ways to prorate rent. The landlord and tenant agree and include in the lease that the prorated amount of the rent will be one month’s rent divided by 30. So, a rental the rents for $2,100 per month will have a daily rate calculated as $70.00.
Then, the number of days in the given month are factored in. For example, if a lease starts on the 17th of January, the tenant will pay rent from January 17-31, or 15 days, equaling a total of $1,050.00.
Prorated Rent Method 2: Calculate the daily rental rate by dividing the monthly rent amount by the number of days in the year, 365, divided by 12 months.
Another common way to prorate rent is to go by the number of days in the year. So, 365 days divided by 12 months equals 30.42.
In this case, based on the rental amount in example No. 1, the daily rental rate is $2,100 divided by 30.42, or $69.03. In this case, if the tenant moves in on January 17th, they owe $69.03 times 15 days, or $1,035.45.
Prorated Rent Method 3: Calculate the daily rental rate by dividing the monthly rent by the number of days in the specific month the tenant will be moving in or out.
In this scenario, a landlord may get more specific. In a month with 30 days, or in the case of February, with 28 or 29 days, the daily rent will be higher than in months with 31 days. (Note: The prorated rent calculator above uses this method.)
Let’s say the tenant in the above scenario is moving in in February in a year when February has 29 days. In this case, the daily rate is calculated as $2,100 divided by 29, or $72.41 per day.
However, if the tenant moves in on February 17th, they are on the hook to pay for 13 days, from February 17-29, or $941.38.
Prorated Rent Method 4: Calculate the daily rent based on the total amount of rent paid for one year.
In this calculation, a landlord may calculate the daily rent by multiplying the monthly rent by 12, then dividing by the number of days in the year, or 365. Based on the example of $2,100 month rent amount, the total rent paid per year would be $25,200. Then, the daily rent would be $25,200 divided by 365, or $69.04, which is very close to example No. 2. However, if you use this method during a leap year, you would divide by 366 days.
Another thing that tenants should be aware of is that some landlords require a full month’s rent to be paid before a tenant moves in. In this case, the tenant would pay the full $2,100 plus the deposit, even if they moved in mid-month. Then, in the second month, they would only pay the prorated amount from the first partial month. Then, starting in their third month, they start consistently paying a full month’s every month thereafter for the remainder of their lease. Then, in their final month, rent would be prorated again depending on their move-out date.
Depending on how competitive a given rental market is, as well as how urgent the need is for a tenant to find a place to live, usually it’s the landlord who dictates how prorated rent is calculated. However, it’s important to keep in mind, as with any real estate transaction, much can be left to negotiation between the two parties.
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