Definition of "Annuity Due"
The term annuity due is a contract that demands payment at the beginning of each period. The most common example of an annuity due in real estate is rent when we consider that most landlords require payment at the beginning of each new month and not at the end of the renter’s stay for that period. The annuity due definition can also be an annuity paid at the start of each period. The term annuity is also used in insurance, but the meaning is slightly different.
What is Annuity Due in Real Estate?
As mentioned above, the most frequent use for the term annuity due is the monthly rent payments that the renter pays at the start of each month. Understanding the annuity due meaning, we’ll broaden the spectrum a little and look at the bigger picture.
An annuity due requires two parties that entered in a contract and established through the terms of the contract that payments will be made at the beginning of each annuity period. The individual who receives the annuity due represents an asset for that individual, while an annuity due represents a liability that requires monthly payments for the individual paying it.
As annuity due payments reflect future inflows and outflows of cash, the best method of calculating the value of an annuity for tax purposes is through the cash accounting method. For those recipients of an annuity due that want to understand the entire annuity value while also taking into account the time value of money, the present value calculation provides a broader understanding of the asset.
Example of Annuity Due
Besides the example mentioned above, annuities due can be various. When coming across the term annuity due, just consider any monthly payment that an individual incurs at the start of each month. Here we can list several examples: mortgages, bills, car payments, cell phone payments are all annuities due as the billing period starts at the start of each month. Take cell phone payments as an example, the bill is delivered at the start of each month for the month in question, which means that the user is charged for that month at the start of the month.
Something to keep in mind is that annuities due can increase if recurring obligations are encountered. Looking back at the cellphone payment, if on January’s bill you have to pay $50, but in January, you took a trip to Europe and called your friends in the US from your cell phone. For those calls, on February’s bill, you will be charged an extra cost that needs to be paid in February.
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