Tip #61

Collect a Larger Deposit Instead of Last Month’s Rent

Written on May 4, 2016 by , updated on December 9, 2016

Last Month's RentSome landlords live by a certain mantra before letting tenants move in: Security deposit, first month’s rent, last month’s rent. No exceptions.

While there is no landlord law prescribing that all landlords must collect all those things, it’s good practice for landlords to collect at least first month’s rent when you sign a lease. Landlords should also collect a security deposit because it will be used in case of damages. However, collecting last month’s rent is certainly a topic of debate.

Whether landlords should ask for last month’s rent is a topic of debate.

Our Recommendation

We, here at Landlordology, recommend against collecting last month’s rent. You can listen to the audio version of this article below. Then, you can then decide what your practice will be.

Pro: Lots of cash upfront

Getting all that cash upfront can make you feel more comfortable about renting your property. Some tenants like to “live out the security deposit,” meaning that they think they can use the security deposit to cover their last month.

Tenants often skip out on paying last month’s rent so that they have enough money to move.

Using the security deposit to cover the last month could work out … if there are no damages. But if there were damages, you would need to sue the tenant. If you collect last month’s rent in advance, you don’t need to worry.

Con: It complicates things

Here are three scenarios of possible complications.

  1. Lack of Proper Accounting
    Landlord collects last month’s rent before tenant moves in. Tenant stays for three years before moving out. By that time, landlord forgets they already collected last month’s rent, and arguments ensue.
  2. Change in Ownership
    Landlord collects last month’s rent. Landlord then sells the property to another landlord during the tenant’s stay. First landlord forgets to tell new landlord about collecting last month’s rent. Arguments ensue when tenant gives notice to the new landlord.
  3. Rent Increases
    Landlord collects last month’s rent. Tenant stays for four years, and each year there has been a rent increase of $50. So the last month’s rent, after four years, is $200 more from what last month’s rent was four years ago. Does the tenant need to pay the difference? Arguments ensue.

Probable answer to scenario number 3: Unless you charge your tenant the difference in the last month’s rent at rent increase time, it’s unlikely you’ll be able to successfully collect it when the tenant moves out, according to the laws of most states. (You’ll need to check your own jurisdiction for a specific ruling).

For example, if you will increase rent by $50 a month, at least renewal time, you would also need to charge an additional $50 to cover the last month’s rent (or an additional $100 at lease renewal time). And that will make a tenant who is already not thrilled to deal with a rent increase even less thrilled!

If you don’t ask for the extra money each year, you’ll just have to accept whatever the rent was at the time the tenant moved in. So, in that case, you are losing money by charging for the last month upfront.

Con: Some tenants won’t have the money

Not everyone has enough money saved up to pay first month’s rent, security deposit, and last month’s rent, so you’re limiting your market. And even if they do have enough saved to pay for all three, if your competition doesn’t charge last month’s rent, you’ll probably have a more difficult time renting your place.

Con: You’re limited on how you can use last month’s rent

Calling the deposit “last month’s rent” instead of asking more for a security deposit limits what you can do with those funds. For example, if there were damages to the place that exceeded what the security deposit covers, you could not use the last month’s rent to pay for the damages. That money could only be applied to last month’s rent.

A Better Solution: Collect a Larger Security Deposit

Check the security deposit limits for your state. Many states have no limit on how much landlords can charge. Of course, that doesn’t give you free rein to charge outrageously large fees. You still need to charge only what the market will bear.

Many states limit the amount to what landlords can charge for a security deposit, such as 1 ½ months’ rent in Michigan. And a few states allow landlords to charge only one month’s rent, like Hawaii.

If your state allows you to charge more than one month’s rent as a security deposit, this should serve you better than collecting last month’s rent. That way, if the tenant skips paying that last month, you can use the extra money you collected for the security deposit to cover that. Of course, if there were damages that exceeded what you collect, you’ll still need to sue.

Bottom Line

There really is no reason for you to collect last month’s rent. It’s better to collect that extra money in a security deposit. The exception is if you live in one of the few states that limit the amount you can charge for a security deposit.

Do you agree or disagree with this model. Let’s talk about it in the comments below.

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19 CommentsLeave a Comment

  • Oliver Overton-Morgan

    Here in Florida, there are attorneys representing tenants in order to sue landlords over security deposit disputes. It is easy for tenants to win security deposit claims cases in Florida, since if the judge disagrees with just one of the deposit claims, the landlord will lose the case and end up being forced to pay thousands of the tenant’s attorneys fees.
    Therefore, it makes it almost useless to hold a security deposit these days if the tenant disputes the claim.
    Holding the last month’s rent avoids having to claim a missed rent payment from the deposit.

    • Laura Agadoni

      Hi Oliver,
      You make a good point. In areas where there are severe penalties to landlords who don’t follow all the security deposit rules, it becomes risky for landlords to try to use them! Many landlords are starting to charge non-refundable fees upon move in instead.

      • Oliver Overton-Morgan

        Let me explain in further detail… In the entire state of Florida, if a Landlord follows all the security deposit rules, a tenant can still dispute a deposit claim and take it to court. That’s fair. But then it is then entirely left up to the Judge to decide in their own personal opinion if they feel that any of the claims are fair. What is not fair is that if the Judge disagrees with simply one of the claimed items, the landlord is forced pays all of the tenant’s attorney fees.
        The first step by the attorney before going to court is to threaten the landlord with court, so that they will return all the claimed deposit money along with a flat attorney fee.
        This is easy money for attorneys and they are jumping on the bandwagon.

      • Hannah

        Laura,
        I am an indépendant Landlord. I have a tenant who is self-employed but had a history of eviction 3 years ago. They want to give me 3 months worth of deposit. It sure makes me nervous when they offer all that large deposit. This couple also have their father and mother and a brother plus to kids as occupants. There is total 5 adults. It seems as if it almost rented to two families. I am afraid of much wear and tear. What kind of non-refundable deposits I can ask for? This is an upfront fee right?. Can it be cleaning fee?

        • Laura Agadoni

          Hi Hannah,
          You’ll need to check your state law on whether you can charge a nonrefundable fee, and if you can, whether there is a limit combined with what you charge for the security deposit. https://www.landlordology.com/state-laws/
          Keep in mind that deposits are refundable. You keep them only if you need to use the money. But fees are nonrefundable. If you can charge a nonrefundable fee, you can call it a cleaning fee.

    • M Medina

      Tenants should be aware that they are taking possession of property than exceeds other forms of possession. As with any other business, boundaries are set to protect both parties. Landlords provide living spaces that have been paid for and ask that the tenants respect the agreement to pay and take care of the property. With that said first and last months rent plus a security deposit leverages you to occupy and enjoy a property that would cost you way more if you were to purchase. Responsibility, respect and communication sets the tone for a tenant / landlord relationship.

  • Allen

    I’m curious about what common practice is out there regarding deposit/last month. For example, (assuming a deposit of 1 month rent):

    – first + last + deposit = 3x rent due on signing
    – first + deposit = 2x
    – first + large deposit = 2.5x or whatever.

    As a new landlord, I’d like to know what my applicants are expecting based on what they are seeing in the market.

    • Lucas Hall

      I’ve found that many landlords in the 80’s and 90’s use to take first + last + deposit = 3x rent due on signing.

      However, tenant screening has gotten more effective, and so there is less risk. More and more landlords and property managers only take first + deposit = 2x. Many property managers of large apartment complexes even waive the deposit as an incentive to sign.

      Personally, I think if you try to collect first + last + deposit, your applicants will just say “no thanks” and they will go rent the house down the street instead of renting from you.

      • Allen

        Thanks Lucas – that was my gut feel, but I didn’t have any real input to validate it. If others were commonly asking 2.5x or 3x to get in, I would have wanted to soft promote my 2x (first + deposit) as a competitive advantage.

  • Mark Weckwerth

    Ok, I’ve asked my lawyer and he didn’t really answer my question. I am in Kansas and the landlord tenant act says you can only collect 1 months rent for deposit. I asked my lawyer if I can collect first and last months rent plus deposit. He said I can call it last months rent but it will basically be the deposit. I’ve heard of other asking for first, last and deposit and even did it once myself without asking the legality. I have had really bad luck lately and hate loosing money when I won’t be able to track down the tenant. I actually just had a tenant, that I had taken first and last months plus deposit move without notice and no forwarding address. They left me with an infestation of cockroaches I don’t know if I’ll ever get rid of.

    • Laura Agadoni

      Hi Mark,
      That really doesn’t make sense. Last month’s rent is not the same as a security deposit. You might wish to check with this lawyer again to make sure you can have the three charges: first, last, and security.

    • J

      Dupont Advion gel bait will get rid of your roach infestation. It works!

      • Mark Weckwerth

        J,

        Thanks for the info. After two treatments by the exterminator and three fogger treatments (from Home Depot) I’ve finally seen a reduction. The last time I was in there I didn’t see any that were alive. I’m hoping one more spraying will kill the end of the egg cycle.

  • Bob

    Here in Washington, a tenant must give 20 days notice before vacating. In my situation, the tenant paid first + last + security deposit when signing the lease. The tenant paid for July rent, and then ten days later, found a new place and gave notice 20 day notice (which is within the law).

    He is now asking for a refund of the last payment he made, as he claims he has already paid “last month’s rent” at the start of his tenancy. Do I need to give him the refund? If so, how long do I have to give it?

    (Keep in mind, I am NOT talking about the security deposit)

  • Laura Agadoni

    Hi Bob,
    Your tenant has already paid for the month he intends to vacate since, in this case, his first month is also his last month. Therefore, you need to refund the last month’s rent. I don’t know when you need to return last month’s rent by, but you need to return the security deposit within 14 days in Washington. If you don’t return both by then, your tenant might sue you.

  • DANIEL

    I’m in Washington state and have a tenant that has only paid part of Junes rent and is now past 30 days past due. On move in he paid both a security/damage deposit & last months rent. I have served him a 5 day pay or vacate notice which as passed without payment or moving out. can I immediately pull the last months rent out of the acct (NOT the deposit) and use the last months rent?

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