Some 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.
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.
- 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.
- 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.
- 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.
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.
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.