For years, it was common to see rental listings state “First, last and security” due before move-in. No exceptions. While it is not legally required to collect these, it is generally a good idea for landlords to at least collect first month’s rent when you sign a lease. Landlords should also be collecting a security deposit (typically equal to one month’s rent) in case there is any damage done to the property. Well, what about last month’s rent?
We, here at Real Property Management Rental Direction recommend against collecting last month’s rent. Why, you may ask?
- Accounting Nightmare: 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. Another thing to consider is state laws; here in Florida, it is illegal to commingle deposit money. Therefore, you would need two different back accounts; one for security deposits and one for last month’s rent.
- 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? Typically yes; but this situation will leave a sour taste in the tenants’ mouths and they associate this back to you, as the landlord. You could charge your tenant the difference in last month’s rent at rent increase time, it’s unlikely you’ll be able to successfully collect it when the tenant moves out (check your own jurisdiction for a specific ruling). However, this 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.
- 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.
- 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.
- 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 would be to 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.
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