Developer · Andover, MA · Member since 2008 · 1k+ posts · 489 votes
I'm new to landlording so please bear with me.
I'm closing on a condo in the next month and I'm not sure if I should collect last month's payment or a security deposit. The condo is in a low income area so I don't think I could get away with collecting both. I'm going to see if I can find a tenant for a 1 year lease, but if not, I'll have to go with a month to month lease.
Should I collect a security deposit or last month's rent? Also, are there any differences from a legal perspective?
I assume with a month to month, I would just collect a security deposit?
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
There is a difference. A security deposit is not "income", it's treated as a deposit in case the person damages the unit. You take money for anything above normal wear and tear. Security deposits you need to check with your state if it needs to be in an non-interest bearing account. Also you need to check with your state on the amount -- most times people collect the security deposit as the same amount as the rent, but you can collect any amount up to your state's limit.
Regarding the "last month's rent", if you collect it now and then the tenant stays a while and during that time, you raise the normal rent, if you don't collect extra for the pre-paid rent, many states won't allow you to collect it.
I would recommend collecting first month's rent and a security deposit, and leaving the last month's rent out of it. Include a provision in your lease that the tenant must give you 30 days written notice to leave, and that they may not use the security deposit as the last month's rent.
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
There is a difference. A security deposit is not "income", it's treated as a deposit in case the person damages the unit. You take money for anything above normal wear and tear. Security deposits you need to check with your state if it needs to be in an non-interest bearing account. Also you need to check with your state on the amount -- most times people collect the security deposit as the same amount as the rent, but you can collect any amount up to your state's limit.
Regarding the "last month's rent", if you collect it now and then the tenant stays a while and during that time, you raise the normal rent, if you don't collect extra for the pre-paid rent, many states won't allow you to collect it.
I would recommend collecting first month's rent and a security deposit, and leaving the last month's rent out of it. Include a provision in your lease that the tenant must give you 30 days written notice to leave, and that they may not use the security deposit as the last month's rent.
Residential Real Estate Broker · Member since 2009 · 8 posts · 0 votes
13y
Hi Justin, welcome to Landlording! I agree with Dawn. You should collect full first months rent + security deposit at move in whether it's a lease or month-to-month. If the tenant moves in at the middle of the month, then you will pro-rate the 2nd Month's rent for those number of days. For example, if the tenant moves in March 15th on $500 monthly rent, the daily amount is $16. So, in April the tenant will pay $266 for the 16 days in March that Tenant occupied the property. When you sign the lease on March 15th, he will pay $1,000 for move in.
I'm not sure of the legalities of collecting a security deposit vs. last month's rent. You might want to consult a CPA.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Just answered this kinda, saying you're closing doesn't say if you are buying or selling.
Buying, you should collect the rents at closing unless you close on the 1st when rents are due, then you could collect them if they were uncollected. You will also be credited with deposits collected and those amounts are a liability to the LL and must be accounted for as required by state law.
Selling, if closing say on the 15th, you should have collected the entire months rents and then at closing you will credit the buyer with rents unearned and transfer all deposits.
Month to month or lease, doesn't matter for the allocation of rents collected.
The other part of your question is to management and marketing issues, collect what you can get as you become responsible and authorized to collect such funds, in other words as the owner. :)
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Not enough info really, the owner lived in the house but it's a condo?
Are there existing tenants? Did the seller collect rents?
Did the bank have the right to collect rents and apply amounts to the loan?
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Things I consider a MUST: first month's rent and security deposit to move in.
I have stopped taking "security toward last month's rent"; when I did get that, it was worded as in the quotes so as to NOT be hemmed in to that amount when the rent has increased since that initial amount was paid.
Last month's rent and security deposit are quite different. Last month's rent means that in the last month of the lease the tenant does not pay you any rent. Security deposit is intended to cover any damages that may have been caused by the tenant during their occupancy. The word "deposit" has an implied meaning of something that is to be returned; rent does not imply that you return money to the tenant (unless the unit becomes uninhabitable during a month where rent was received).
Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
13y
As a side note and it pretty much goes without saying but worth mentioning, In all my leases I have a statement that says:
Under NO circumstances is rental security to be used as rent.
YOu always get the tenant who tries to use the security deposit as last months rent which in turns defeats the whole purposeo of having a security deposit as nine times out of ten damage can and will occur while the tenant is moving out.
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
13y
Originally posted by Chris Masons:
YOu always get the tenant who tries to use the security deposit as last months rent which in turns defeats the whole purposeo of having a security deposit as nine times out of ten damage can and will occur while the tenant is moving out.
An easy way around this is to just make the security deposit a wee bit smaller than the rent.
Developer · Andover, MA · Member since 2008 · 1k+ posts · 489 votes
13y
Bill Gulley The seller was living in the condo as her residence. There was never any tenants in there. I'll be the first to use it as a rental.
Steve Babiak Thanks Steve. I understand the basic terms of a security deposit vs. last months rent. My main concern is that the tenant will use them interchangeably. Due to the depressed area that I'm in, I suspect tenants will use a security deposit as a last months rent. I like Chris Masons suggestion of putting in the lease agreement that the security can't be used as a last months rent.
Lender · Woodland Hills, CA · Member since 2013 · 362 posts · 115 votes
13y
Originally posted by Chris Masons:
As a side note and it pretty much goes without saying but worth mentioning, In all my leases I have a statement that says:
Under NO circumstances is rental security to be used as rent.
You always get the tenant who tries to use the security deposit as last months rent which in turns defeats the whole purposeo of having a security deposit as nine times out of ten damage can and will occur while the tenant is moving out.
Thank you Chris!
I read through the whole thread before adding my .02, and very wise peeps have given thoughtful advice.
. . . I add: first, last AND security. If they dont have security (as that is all a chunk of grocery money) I offer to finance the security at 18% interest until paid and make it an addendum to my lease agreement. To not pay it sets up an instant default and you are covered by the last month's that you have already collected upfront.
Investor · -, IL · Member since 2010 · 409 posts · 616 votes
13y
I collect a security deposit instead of last months rent.
The problem I run into is that in my low income rentals, tenants will still use the security deposit as last month's rent even if the lease says it cannot be. What am I going to do, waste extra money trying to go after someone in court that doesn't give a crap about their credit or having a collection against them? No, I just realize it is part of the game with low income people, get the unit back up to par and get it rented again.
I have not had this problem yet with my nicer rentals, those tenants seem to understand the difference between a security deposit and rent.
I do like the idea that Tevis brought up about financing the security deposit.
Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
13y
without reading every reply, here's what we do: we always collect first and security. that's a no brainer. For those who are marginally qualifying, we collect DOUBLE security (vs. first, last, security) reason? You CANNOT give someone a termination notice that expires before the end of the period through which they're paid. Here in Maine you can only give 7 day TOL if they're late, destroying the place, endangering, and you have to have witnesses the prove all but the late rent, so we usually give a 30 day "no reason" TOL if someone is not working out .... if they've paid last month's rent, we have to tack that extra period of time through which they're paid up to the 30 day notice. With double security, we do not. Maine law limits us to this amount as well. we cannot take any more than double security or last and security.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Originally posted by Ryan B.:
I collect a security deposit instead of last months rent.
The problem I run into is that in my low income rentals, tenants will still use the security deposit as last month's rent even if the lease says it cannot be. What am I going to do, waste extra money trying to go after someone in court that doesn't give a crap about their credit or having a collection against them? No, I just realize it is part of the game with low income people, get the unit back up to par and get it rented again.
I have not had this problem yet with my nicer rentals, those tenants seem to understand the difference between a security deposit and rent.
I do like the idea that Tevis brought up about financing the security deposit.
Those low income tenants usually don't have 3 months worth of cash to start a new lease - so you sort of have to go for two months, just to be able to compete for the tenant pool with the other landlords. Then you have to allocate that two months worth of money - either first month rent and security deposit, or first and last month's rent. In the first case, a deposit to cover damages means that you can use it for that. In the latter case, you can't cover damage with any of the money.
So, that means we allocate it to first month rent and security deposit. And the lease has to contain the "Under NO circumstances is rental security to be used as rent" type of clause. So when the tenant is applying for your unit, one of the screening question you use with their former landlord is "Did they pay rent in the last month or did they try to apply the security deposit to cover rent?" That way you know what you're up against if you rent to them and time comes to move. And if they don't pay the last month's rent, you have to tell them when they give notice that you will be forced to evict if the last month's rent goes unpaid, and that you HAVE filed for eviction before when tenants tried to do that; and then you have to file that eviction if they make that choice, even though you think it's throwing good money after bad with no chance of collecting on any judgment. It's about track record.
I don't like financing anything for the tenants - it's enough that I finance the house itself in a way. Not sure how that high interest rate would hold up in a legal challenge. Not sure how the accounting for the deposit would be handled - it certainly isn't clear whether the amortization of the security means that mostly interest is paid early on. So I'm not going to say that's a good idea to use (maybe good to be thinking of ideas though).
Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
13y
Originally posted by Chris Masons:
Robert, No no no!!!
That is the wrong mindset altogether! You want to be holding the maximum security you can allowed by law. Which is month and a half in NJ.
By holding less you put yourself more at risk. Always ask for the max that you can!
Chris Masons I guess it depends on how much rent you are getting. When I rent out a place for $1795 then I ask for a $1700 security deposit. Now they know that they cannot use that security deposit for last months rent because it wont cover the full amount.
I don't even know what the max is in Texas. I don't think the law is the constraining factor. It is more likely what the market will bear.
Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
13y
Originally posted by Robert Steele:
Originally posted by Chris Masons:
Robert, No no no!!!
That is the wrong mindset altogether! You want to be holding the maximum security you can allowed by law. Which is month and a half in NJ.
By holding less you put yourself more at risk. Always ask for the max that you can!
Chris Masons I guess it depends on how much rent you are getting. When I rent out a place for $1795 then I ask for a $1700 security deposit. Now they know that they cannot use that security deposit for last months rent because it wont cover the full amount.
I don't even know what the max is in Texas. I don't think the law is the constraining factor. It is more likely what the market will bear.
If you make the security slightly less my gut feeling is that the tenant will then just give you a check for the difference for the last month - which again defeats the purpose because then again you are not holding ANY security whatsoever for that last critical month.
If you are charging 1795 a month the renter should be able to come up with a month and a half security. IF they cannot that raises a BIG red flag for me and tells me tenants do not have any money and it will be a struggle to pay the rent. This is just my experience. But as a rule I always collect the max security deposit I can do reduce my exposure to loss.
Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
13y
Hi Justin:
Wow, you got some quick and great response!
Main thing is to check your state regulations. You're getting some great answers here, but some of them don't fly in my state. State laws are very specific about maximums you can require.
Here, the maximum you can collect is different for 12 month leases than it is for month-to-month. In North Carolina, we are not allowed to collect last month's rent.
And, I would never finance the deposit because, if they can't afford to move in, they can't afford the unit. You also have to be careful about interest rates you charge because of usury laws.
The security deposit we charge is different, even if slightly, from the rental amount to help tenants "get it" that it will not be credited toward any monthly payment.
Involved In Real Estate · Everett, MA · Member since 2013 · 51 posts · 4 votes
12y
@Justin Silverio which did you end up going with for your tenants? I have been encountering a similar issue where I'm in a low income area and it's been a challenge for me to find people that cover 3x rent with their income, let alone cover the 1st/Last/Security. I've also encountered a number of people claiming the other landlords in the area only ask for 2 months, not 3 up front. I have carried my place vacant for a few months now because I know it's the winter and not the ideal tenant pool out there now and I would rather have the vacancy than to deal with an eviction and having someone ruin my newly renovated place during that process.
"If you are charging 1795 a month the renter should be able to come up with a month and a half security. IF they cannot that raises a BIG red flag for me and tells me tenants do not have any money and it will be a struggle to pay the rent."
Involved In Real Estate · Everett, MA · Member since 2013 · 51 posts · 4 votes
12y
@Account Closed 3x rent is a bare minimum in my mind......the way I understand it is that the calculation is based on before taxes, so taxes right off the bat eats away 1/3 of their income and then If people have one or more kids, a low income job, utilities, food for their family, clothing, medical bills, etc. then how are they going to cover the rent?
Developer · Andover, MA · Member since 2008 · 1k+ posts · 489 votes
12y
Hi @Dan Borecki . I ended up collecting 1st months rent and a security deposit. I came to the realization that most people in the area just can't come up with that amount of cash. I went with the tenants who I felt would treat the unit the "best" and who passed my background check. The tenants have been GREAT so far, always paying a week ahead and never calling me for anything. I went by the property months ago randomly to check up and the place was spotless. Hopefully that continues...
I would say not to make the 3 months rent a hard and fast rule. Some qualified people can't come up with the funds but some unqualified people can.
Involved In Real Estate · Everett, MA · Member since 2013 · 51 posts · 4 votes
12y
@Account Closed I have come to discover that they are all living in the town of my investment property. All great people, just can't cover the 3 month's worth of up front payments, which is why it seems a good amount of them are on section 8.