How to calculate prorated rent and why it matters?
Prorated rent refers to rent that is calculated in a proportional manner. Instead of charging for the entire month, prorated rent charges the tenants for the number of days they rented the property.
Offering prorated rent is a nice way to attract potential clients to your property since it will allow them to pay just for the time that they actually use the space. Many renters, especially those who have to move in or out in the middle of the month due to various constraints, will appreciate the savings. After all, with prorated rent, a tenant can save half a month of rent or more.
While you, as the property manager, no longer get the full month of rent, it lets you attract tenants. Prorated rent also gives you more flexibility with tenants. For example, what if you need to make repairs between tenants? Without prorated rent, you would need to have a full month with the space empty, whether the repairs take 20 days or two days. With prorated rent, you could have a tenant move in after you finish the repairs and still earn some rent for that month, instead of none.
What is prorated rent? What are prorated charges?
As mentioned, prorated rent lets a tenant pay for just the portion of the month that they rented the property. Prorating rent allows them move in on the 30th of a month instead of the 1st and pay for an extra day (or two, depending on whether the month has 30 or 31 days). On the other hand, it lets them stay a few days after their lease ends and pay extra for each day.
Prorated charges involve calculating a rate per day based on the monthly rent, then multiplying it by the number of days. It adds flexibility and can benefit both tenants and property owners, depending on the situation.
How do you calculate prorated rent? — Major trends influencing prorated rent
To calculate the rent prorate, you first need to decide which method you use to calculate the daily rent. You can choose to use the number of days in a year or the days in a month. In the latter case, you can use an average of all months (30.42 days), the current month (of 28, 29, 30, or 31 days), or a “banker’s month,” which is 30 days. As you calculate rent, remember to account for leap years, unless you use the average or “banker’s month.”
The basic formula to calculate prorated rent is:
rent per day x days of rent required = prorated rent owed
Sample prorated rent calculations
The important number in the above calculation is the rent per day. We’ll show you example calculations for each of the methods mentioned above. For all of these examples, assume that it is not a leap year, monthly rent is $1,000, and the month in question is October, which has 31 days.
Based on days in the month
The daily rent would be: Total Monthly Rent / Number of Days in the Month.
So, in the example, it would be $1,000 / 31 = $32.26
That $32.26 would be the rent per day, so you just multiply it by the number of days to get the prorated rent amount.
Based on the average of all months
As mentioned, the average number of days in a month is 30.42 (365 / 12). So, the daily rent would be: Total Monthly Rent / 30.42.
In the example, this would be $1,000 / 30.42 = $32.87.
Based on banker’s month
We already established that a banker’s month has 30 days. As such, the daily rent calculation is: Total Monthly Rent / 30.
In our example, this would look like $1,000/30 = $33.33.
Based on the days in the year
You need to complete one extra step to calculate the prorated rent based on the number of days in the year, as the formula is Annual Rent / Days in a Year and most leases list the monthly rent, not the annual one. The full calculation would be:
(12 Months in a Year x Monthly Rent) / Days in the Year (365 or 366)
So, in our example, it would be (12 x $1,000) / 365 = $32.88
Use an online calculator
If you do not want to do the math or worry about making a mistake in your calculations, you can also use an online calculator for prorated rent. Several options are available, such as this one that asks for the rent amount, move-in date, and billing date. This one has the same fields, but it lets you also adjust the currency if you wish.
A note on choosing the calculation method
You can choose any of the four methods mentioned above for calculating prorated rent (number of days in a year, days that month, average days in a month, or banker’s month), but you should always be sure that you are clear and consistent on your chosen method. Ideally, you will include your method for calculating prorated rent in the lease.
You should also be consistent with your tenants as to whether you offer prorated rent. There are two ideal ways to be consistent in this regard, a) always offer prorated rent or b) never offer prorated rent. You could also only offer it when a tenant asks, but that makes it harder to be consistent.
How is rent prorated at closing? — The parts of prorated rent
Prorating rent at closing is an important part of any real estate sales that involve rental properties. The seller will have to prorate the rent that they received before closing to the buyer. In other words, the seller pays the buyer rent that accounts for the time between closing and the end of the current rental period.
The calculations for this prorated rent are the same as those used in interactions between landlords or property managers and tenants. You calculate the rent per day then multiply it by the number of days. The formula would be:
prorated rent due to buyer = days between rent collection and closing x daily rent
For example, if you sell a unit that pays $1,000 in monthly rent with closing on sept. 12 but rent collected on sept. 1, you would have to pay the buyer 12 days of prorated rent from the unit. Assuming you use a banker’s month, you would have a daily rent of $33.33 (based on our example calculations above), so you, as the seller, would owe the buyer 12 x $33.33 or $400.
Prorated rent vs. Monthly rent
Prorated rent is very different than monthly rent, as the latter charges tenants for any month that they spent any time in the unit while prorated rent only charges for the days they actually used it. It comes down to a difference of renting based on the day versus renting based on the month.
With monthly rent, a tenant that moves in late or moves out early still pays for those full months. Or a landlord that needs to take a rental off the market temporarily has to do so for a full month. By contrast, prorated rent is more flexible, providing wiggle room in both of these situations.
Summary — why property managers should care about prorated rent
Not only is prorated rent incredibly straightforward to calculate, with or without an online calculator, but it can help property managers attract clients. It can also help minimize lost rent between tenants, as there is no need to wait a full month between the old tenant’s move-out and the new tenant’s move-in. Nor is there a reason for pressure when a previous tenant moves out precisely on the 31st, nor frantic cleaning and turning over the unit.
Podium can help you with all your tenant communications, from back-and-forth conversations to collecting rent, even to property management, a business plan, tips and so much more. You can even get started using Podium for free today.