Short version: your settlement statement on a rental purchase does not just show the price and the loan. It shows a block of adjustments called prorations that split the property’s ongoing costs and its income between the seller and you as of the closing date. Property taxes, rent already collected for the month, and the tenants’ security deposits all cross that line. Depending on whether your county bills taxes in arrears or in advance, and where in the month you close, prorations can move your cash to close by thousands of dollars in either direction. This guide walks the three that matter on a tenant-occupied rental, with the arithmetic.
FMC Capital is a Pittsburgh-based mortgage brokerage. We place rental and short-term investor loans, and prorations are the single most common reason a borrower’s final wire is different from the estimate they were quoted a week earlier.
What a proration actually is
A proration is not a fee. Nobody is charging you anything. It is an accounting split of a cost or an income item that covers a period spanning the closing date, so that each party pays for or receives the portion belonging to the days they owned the building.
Every proration shows up twice on the settlement statement, once as a credit to one side and once as a debit to the other, and the two numbers are identical. That is the tell that you are looking at a proration rather than a cost. Closing costs hit one side only. Prorations always hit both.
The reason this matters to a leveraged investor is that prorations are the part of your cash to close that you cannot shop, cannot negotiate down, and cannot predict from a rate sheet. They are driven entirely by the calendar and by how your jurisdiction bills.
Property taxes: arrears and advance are opposite worlds
This is where most of the money is, and where most of the confusion comes from, because two counties can handle the identical closing in exactly opposite directions.
Arrears billing. The tax bill you get today covers a period that has already passed. Much of Pennsylvania’s county and municipal cycle, and a great many jurisdictions nationally, work this way. When taxes are billed in arrears, the seller has not yet paid for the days they owned the property this cycle. So the seller credits you at closing for their share, and later, when the bill arrives, you pay the whole thing. Your cash to close goes down. Your escrow obligation goes up.
Advance billing. The bill covers a period that has not happened yet, and the seller already paid it. Many school district levies and some municipal bills run this way, which is why a single property can have one bill prorated in each direction on the same settlement statement. When taxes are paid in advance, you reimburse the seller for the unused days. Your cash to close goes up.
Two practical consequences follow. First, never assume the direction. Ask the title company for the proration method and the exact bills being prorated before you finalize your cash-to-close plan. Second, a property with both an arrears county bill and an advance school bill will show two tax prorations pointing opposite ways, and the net can be small even when both gross numbers are large.
Rent: the seller owes you the unearned part of the month
On a tenant-occupied purchase, the tenant already paid rent on the first for the entire month. The seller collected it. If you close on the eighteenth, the seller is holding money for days they will not own the property.
So rent prorates in your favor. The seller credits you the unearned portion, calculated on the actual number of days in the month, not a flat thirtieth.
Three things reliably go wrong here. Uncollected rent does not prorate. If the tenant did not pay this month, there is nothing to split. You do not get a credit for money the seller never received, and chasing it afterward is your problem, not the title company’s. Prepaid last month’s rent is a separate line. If the tenant paid a last month’s rent at lease signing years ago, the seller is holding it and it transfers to you in full, not prorated. Section 8 and voucher portions post on their own schedule. The housing authority share and the tenant share often arrive on different days, and the title company will only prorate what the seller can document as received.
Ask for a certified rent roll and the last two months of deposit records before closing. If the seller cannot produce them, assume the rent proration will come in lower than you modeled.
Security deposits: a transfer, not a proration
This one gets mislabeled constantly. A security deposit is not split by days, because it is not income and it is not a cost. It is the tenant’s money that the seller has been holding, and it belongs to whoever is the landlord when the tenant moves out. So the full balance transfers to you, dollar for dollar, as a credit to you and a debit to the seller.
Two details matter more than the mechanics. Most states require deposits to be held in a specific way, and several require accrued interest to be credited to the tenant, which means the number transferring should be the deposit plus any interest, not the original figure from a lease signed in 2019. And your obligation to return that deposit at move-out is now yours in full, regardless of whether the seller actually handed the money over. Take the credit at closing. Do not accept a side letter promising a wire later.
The full arithmetic on a real deal
Take a 260,000 dollar tenant-occupied duplex. You are putting twenty-five percent down and financing 195,000 dollars at seven and five-eighths percent on a thirty-year amortization. Both units are rented, 1,150 dollars and 1,100 dollars, so gross rent is 2,250 dollars a month. Annual taxes are 4,200 dollars. You are closing on August 18, taxes are billed in arrears on a calendar year, and each tenant has a deposit equal to one month of rent.
Down payment: 65,000 dollars.
Estimated closing costs and prepaids (origination, title, appraisal, recording, first-year insurance, and an escrow cushion): call it 9,100 dollars. Our breakdown of DSCR rental loan closing costs walks each line.
Tax proration, arrears. The seller owned the property for 229 days of the year through closing. 4,200 divided by 365 is about 11.51 dollars a day. 229 days is 2,636 dollars, credited to you.
Rent proration. August has 31 days. You own 14 of them, the eighteenth through the thirty-first, assuming closing-day rent is yours. 2,250 divided by 31 is about 72.58 dollars a day, times 14, is 1,016 dollars, credited to you.
Security deposits. 1,150 plus 1,100 is 2,250 dollars, credited to you in full.
Now the wire. 65,000 plus 9,100 is 74,100 dollars before adjustments. Subtract 2,636, 1,016, and 2,250, and the number you actually send is 68,198 dollars. Prorations moved your cash to close by 5,902 dollars, roughly eight percent of the total, and none of it appeared on the rate sheet.
Flip one variable. If those taxes had been billed in advance and already paid by the seller, the 2,636 dollar credit becomes a 1,564 dollar charge to you for the remaining 136 days, and the same closing needs about 72,400 dollars instead. Same house, same loan, same day, a 4,200 dollar swing driven purely by billing convention.
Before you commit, run the deal itself. Our DSCR deal calculator will show you where 2,250 dollars of rent against that payment lands your coverage ratio.
How prorations interact with escrow, and why the tax credit is not a gift
Here is the trap. That 2,636 dollar tax credit feels like found money at the closing table. It is not. It is the seller reimbursing you for a bill you are about to pay in full, and if you are escrowing, the servicer is simultaneously collecting monthly toward that same bill plus a cushion.
The credit reduces your wire today. It does not reduce what you owe the county in January. If you waive impounds, you now have to actually hold that money for five months instead of spending it on the rehab. Our guides to escrow and impounds on a rental loan and to when you can waive impounds cover both sides of that decision.
There is a second interaction worth knowing. Prorations are not seller concessions. A tax credit for days the seller owned the property is an adjustment, and it does not count against the interested party contribution cap. A seller credit toward your closing costs is a concession and it does. Lenders and title companies occasionally lump them into one line, and when that happens on a file already near the concession limit, it creates an underwriting problem out of nothing. Our post on seller concessions and credits explains where those caps sit and why the labeling matters.
Three things to do before closing week
Get the draft settlement statement at least three days out and read the adjustment block first. Not the fees. The adjustments. That is where the surprises live, and three days is enough time to correct a proration error.
Confirm the proration direction in writing. One sentence from the title company saying which bills are being prorated and whether they are arrears or advance is worth more than any estimate.
Verify the deposit balances against the leases, not against the seller’s summary. If a lease says 1,150 dollars and the seller’s spreadsheet says 900 dollars, you are inheriting a 250 dollar liability per unit that nobody funded.
And plan your cash for the wrong direction. If you have budgeted assuming a tax credit and the county turns out to bill in advance, you need the difference liquid on closing day. Where that money comes from also has to satisfy the lender, which we covered in our guide to acceptable sources of cash to close.
How we approach it
When we quote a rental purchase, we ask for the closing date, the county, and the rent roll before we build the cash-to-close estimate, because those three inputs move the number more than the rate does. It costs us ten minutes and it prevents the call nobody wants to make on the day of closing.
If you have a tenant-occupied deal under contract and want the real wire figure rather than a template estimate, send us the address, the contract price, the closing date, and the leases. We will build the proration block and tell you what you are actually sending. There is no cost for that. Reach us through our contact page or at 412-990-2941, and our DSCR rental loan page covers the product itself.
FMC Capital is a licensed mortgage brokerage, NMLS #1840537. Loan terms, rates, proration conventions, tax billing cycles, and security deposit rules vary by lender, borrower, property, county, and state, and are subject to change without notice. Nothing in this article is a commitment to lend, and nothing here is tax, accounting, or legal advice. Figures used above are illustrative examples.
FMC Capital, NMLS #1840537. Equal Housing Opportunity.