Prepaid Rent

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Prepaid Rent

Post  Max on Fri Aug 13, 2010 10:32 pm

Idea is this:

Rent is $1300 per month.

If I prepay rent for the last 5 months of the year, this would be $6500. In exchange, I am asking for a discount of $200.

So simple analysis says that $200/ $6500 = 3% (not too bad, the landlord might be willing)

However, if you break out the payments and use an annualized return:

19% (interest rate required to bring opportunity cost to $200)

Aug -1300 0 0
Sep -1300 30 (20.00)
Oct -1300 60 (40.00)
Nov -1300 90 (60.00)
Dec -1300 120 (80.00)

So I realize that this is actually a pretty awesome return with zero risk and tax free since it is expense reduction and not actually income.

Turns out it is illegal for the landlord to accept more than 2 months of prepaid rent, but this same tricky math can be used in other prepaid deals.

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