Security Deposit vs Last Month's Rent?
Justin SilverioPro Member
Developer · Andover, MA · Member since 2008 · 1k+ posts · 489 votesI'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?
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.
@Justin Silverio good points! Thanks for sharing, I am glad to hear it has worked out so well for you so far. It sounds like I'm going to have to start taking 1st/security into consideration as well, but am going to stick to my minimum 3x rent rule, especially if they can't cover 3 months up front.
Joe Gore
Hey Joe Gore you calling HUD snake oil salesmen? See here for another thread where your same question was already answered:
I get your point but if HUD told you to jump of a bridge or stand in the middle of a freeway would you do that? There is nothing that says you must follow what HUD says. You need to look what everyone else is charging in your area.
Joe Gore
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.
Steve, I really liked this point you made about including it in the lease that the security deposit cannot be applied to the last month's rent. Am I understanding it correctly that you actually follow through with what you told them about evicting so that you can going forward have more weight behind your words with future tenants? Has it really been worth it to go through an expensive eviction process over the 1 month of rent? I'm wondering if it's more worthwhile to take that approach if you have a large quantity of rental properties than where I just own one 3-family at this point.
@Account Closed I don't think the point is to follow what HUD is saying, it's more because it logically make sense when people are at a lower income threshold to have 3X rent as a minimum income and that they also have savings. I would rather have more than 3X if possible so that they can still keep building up their savings while they are my tenant which then means that they can still pay their rent in the event that any unforeseen expenses come up in their life. They are living on a shoe-string if they're paying rent at any less than 3X their income.
I'm evicting a tenant right now who is apparently trying to use the security deposit as the last month's rent - despite the lease specifically saying it cannot be used for that, despite the tenant initialing that page when we went over the lease, despite my telling her clearly when she moved in that it could not be used as the last month's rent, and despite her own admission when served with the 3 Day Pay or Quit that she is well aware of that fact. This is the 2nd tenant in the last 2 years that has done this, and the previous one agreed to "quit" the premises after being served the notice. Regardless of what is in the lease, if a tenant has a mind not to pay the last month's rent, the Pay or Quit should be served as soon as possible, followed by the eviction. Just be sure it's in there.
As someone else noted, the security deposit will be used to cover the rent, late fees, court costs, and damages, and any shortfall will probably never be seen again.
I collect first month's rent and 1.5x the rent for a security in deposit in NJ (the maximum allowed), and the same amount in FL. In FL, many landlords required first, last, and security but I found there is usually a larger pool of decent applicants if the move-in cost isn't over $3K.
@Aly W. sorry to hear about your having to deal with that mess. What did you mean where at the end of your 1st paragraph you said "Just be sure it's in there"?
You're making me feel a lot better about my decision to hold my place vacant until finding a quality tenant that fits my criteria. Unfortunately from everything I hear you can screen all you want, but will still get burned, so I'm trying to make sure to cover all of my bases with screening people.
I just bought my place about 4 months ago and I have had the mindset to hold off until finding a great tenant since they had to evict one of the tenants before my closing. Luckily one of my terms of the P&S Agreement was to have the place delivered vacant, so it wasn't my responsibility. Believe it or not the selling agent was trying to convince me to keep her as a tenant and hadn't disclosed to me about her not paying rent. I am so glad that I held my ground!! Turns out that she hadn't paid rent in 4 months and they still couldn't get her out for a couple more months after the finally started the eviction process and it didn't help the eviction matters that she was pregnant and had a kid. So that really hurt me since it held up my closing by a few months and now I'm stuck trying to find tenants for the dreaded December thru February period, which has been even worse with the awful winter we're having here in the Northeast.
Thanks Dan :)
As others have said, make sure that clause about the security deposit not being used as the last month's rent is in the lease. If the eviction goes to court, the lease terms will be upheld - I hope. I haven't been to court in FL before but the tenant hasn't paid the rent, and has until Thursday to answer the complaint. Had a near eviction once before but that's another story.
And yes, even the best screening may not predict the future. And sometimes it works in reverse, when a less than perfect applicant is accepted, they work out better than you expect.
That's great that you dodged a bullet with that tenant! We've done 2 evictions in NJ for nonpayment, and both families had young children. Eviction for nonpayment is fairly straightforward in NJ and FL, but you need to file immediately. Waiting will only prolong the money loss and it's probably hard to explain to a judge why a landlord allowed a tenant to get 4 months behind in the first place. So you came out ahead on that - and congratulations on your property! Yes, this time of year is bad for tenants, and this winter has been awful. If you get a tenant in the next month or two, maybe give them a 15 month lease so that it expires in a better month.
Lots of great points from everyone. I rent to higher quality tenants, so I collect the first month's rent and security deposit and only a last month's rent if there's something questionable. I like the idea of 1.5 times rent for the security deposit for lower quality tenants as @Aly W. does. Definitely use a security deposit if you can't also get last month's rent since a last month's rent is only for rent. The security deposit can be applied first to other unpaid costs or damages and lastly to rent if needed - and if rent is still short, you can use an eviction notice whether it works or not. It could stop a tenant from using the security deposit for last month's rent and if the eviction gets recorded, it would mark the tenant background check for the next landlord. Obviously, check your landlord-tenant laws to make sure your rental agreement is lawful.
I'll absolutely be sure to use that clause and also that's a great call on the 15 month lease.... I was thinking of having it come due in September as a 6 month lease and then have a mutual option to extend for another year as a way to avoid this dreaded rental period, but now after having done all of this work to find a tenant it doesn't make sense anymore to me to have such a short term tenant and then have to clean/fix up/re-rent the place again.
Great points again, thanks @Gerald K.
@Gerald K., I wouldn't say all my tenants are low quality - some are in low/no income areas, and have needed social services assistance to get their security deposit (and some got it from their church). But not asking for the last month's rent in addition to everything else opens the door to more applicants. Most of our condos rent for an average of $1000, some for $1100, and 3 times that amount is a chunk of change. A good tenant is one who will pay the rent on time and not trash the place, and if $2500 will get them in the door, I'm fine with that.
@Gerald K.
If you have been prudent in screening and had no evictions as part of your acceptance criteria, then the threat of pursuing eviction can be enough to get your tenant to actually pay the last month of rent when due so that the security deposit is retained to cover damages.
I also follow the practice of an initial lease of other than 12 months in order to have leases end in months where it is preferable to find tenants. But I like to make the first lease less than 12 rather than more than 12; that allows for me to add in a rent increase if some expense takes a jump (like insurance or property taxes usually, but last time the sewer bill that I pay took a big jump) so that the additional expenses can be passed along; also, you can say that it is a try out of sorts to see if things are going to work OK, and if they don't the shorter term allows to part ways sooner. Sometimes things don't work out so better to end sooner; you still have it end during the peak season for finding tenants to avoid a prolonged vacancy, and the departing tenant will also find more units on the market.
@Dan Borecki definitely wait it out. I basically had to go through at least 50 prospective tenants Dec-Feb to finally get a decent one signed up last week. I have a few 2 family houses in a low income area and boy was it apparent in the last 3 months of showing. If I end up with a winter vacancy I will not advertise and go through the massive waste of time it has been. I may advertise it to friends and family, even facebook but NEVER will advertise it in public Craigslist, Postlets or Rentlinx. Just too much of a hassle.
Also check MA law as what you can ask for. In CT we can ask 2 months security or 1.5 if elderly. But because my market doesn't ask for 2 months I am stuck with the 1 month security which the tenants always use for last month rent even after I keep telling them I will not apply the security for last months rent. They don't care and just won't pay the last month. I don't push too hard at that time because many will just ruin your place. I try to visit and tell them to keep it clean when they leave or else I will take them to small claims. So its a balance.
All great points - thing to remember is that you can put almost anything you want into a lease but only good people will honor it....and leases are really written, at least mine are, for the BAD renters. With shared housing it is a little different, we usually do 1st month & 1/2 towards the last month rent but it just depends. In our area, tenants are quick to think they can sue you if you haven't handled the security deposits properly. That's why we switched to first & 1/2 of last month's rent. Plus, we want to make it affordable to our clients who are mostly coming to us to save money. Happy Investing!
As Steve mentioned, setting up leases at different terms initially is something I certainly agree with. You're setting up, what we call in finance as, a maturity distribution, where contracts come due or renewable at different times. Having a tri-plex and all the leases coming due within 3 or even 4 months can catch you with vacancies! Stagger them to ensure sufficient income is always there.
33% of gross income is the standard set in lending as well as rentals and originated by HUD, an elementary aspect of real estate, shows a lot when the absurd is mentioned twice. :)
Great thread.
First thing I would say is just make sure you know your local and state laws dealing with these things. Different states will allow different things, even though the basics are always similar.
For example I am in MA like the OP and some of the recent active inquirers and here it is pretty restrictive in what and how much you can collect and with a security deposit the regs are pretty stringent.
Okay so my opinions that aren't that relevant for 49 states :)
- I like to get 1st, last and security every time if I can. I have done 2.5 months once in exchange for a longer initial lease that brought me from the winter into the summer. The only local tenants I have ever not collected at least that much were on section 8 and you can't get last months, but I still got a security deposit.
- On the local regs topic those are the ONLY things you can collect except for a re-key fee (I've never done that and don't know anyone that does so it isn't customary and have no idea how much you can charge above cost and not get hauled into court). We are also capped at 1 month on security and are not even legally allow to charge an application fee.
- IF I was only going to collect 2 months I would get 1st and last. Locally the security deposit regs are very strict and if you do anything wrong you can be on the hook for treble damages to the tenant and the kind of damage they have to do to not get it all back should be pretty substantial (The charging $10 to change a light bulb stuff won't fly around here...). Also in my experience even my really good tenants usually just don't pay the last TWO months rent and use the security deposit to cover that. Now I've only had 2 that actually had stuff I would have kept some of it and 1 of those actually sent me a check for what I told her she owed (The other did damage that would have pretty much would have taken all the deposit).
- For the idea of having the deposit less than the rent I agree with the that isn't a good idea side. From my experience I would guess that if I say have a place renting for $1000 and had a $950 security I would either a) get a check for $50 from a good tenant or b) be short $50 if they are bad. They will make the probably correct assumption I'm not going to file papers over the $50. It might work if it is way less, like 1 of the few people that hasn't tired that with me is the girl that had the 1/2 month deposit. Maybe the fact it was so far off made it not make sense.