Hey guys, I'm in Minnesota and my renters did not meet the credit score requirement so they agreed to pre-pay the last month's rent as assurance. They are coming up on a year of timely rent and have been great tenants and with COVID and everything, I have been thinking about refunding the last month's rent. I'm looking for recommendations or advice on whether to do so or not. Thanks in advance!

Have they asked you to.  You took this for a reason and while they have been great so far there is always the potential for issues.  It is also hard for tenants to pay the last month when they decide to move and pay deposit and first months rent for the next place.  I think you are a good person for hanging onto it as you are keeping them more mobile and removing that barrier for them down the line.  You could also offer to use it for a month if they get behind or have an unexpected expense but I would prefer not to.  

I would not do it. You will lose your leverage if they should default somehow. Paying rent on time is the expectation for all tenants. They can look forward to that much more as a refund when they move and leave you an undamaged, clean property.  

@Karli F. did you also take a damage deposit?

@Karli F. Give it another year.

Really appreciate the advice! @Adam Martin I hadn't thought of it that way. Great advice! I did also take a damage deposit and pet deposit. Having leverage is always a plus and if they fall behind, can be used for that. They didn't ask or bring it up at all... was just a thought.

If you have a terminal illness...and no heirs.

I would give it “back” to them...  but I dont like being responsible for other peoples money. You have a deposit so IMO that should suffice at this point in time 

@Karli F.

I collect last months rent from every tenant as a pre paid.

Did you make any promises or suggestion you would return it?  If you did then keep the promise. If you didn't they do not expect it back now and may appreciate when they move out that the last month is paid. I also show prepaids on any new lease so  it is clear what they have on deposit. 

@Karli F. I'd keep it since it was part of the original agreement. Just an FYI if your property is in St. Paul, starting 3/1 you can no longer collect more than one month's rent as a security deposit (one exception to this) or use a credit score as a screening requirement. If they've been great tenants so far I'd try and keep them! 

@Karli F.

I agree with what everyone has been saying. No need to return it. It’s goes in your kitty, for future damages. When they move out, if they do, that is when you analyze the costs to get your property back to rentable, and decide how much to return. Think of it as an additional deposit. Lower credit score people pay more percentage for credit due to their unstable past. Major companies play this game every day to protect themselves. If you want to play with the big kids, play the same games. Just my thought.

@ThomasRoy Penland   IMO you cant use prepaid rent for damages in  many locales - Last months rent can only be used for rent. Also many locales will state whether  you can collect last months rent in the first place, so the OP needs to read her local laws and play by the rules. 

Yes, I would not use prepaid rent for damages! Not allowed in my area and just doesn't feel right. Thank you all for your advice! I had a feeling most would say to hold on to it, just needed to rationalize it again. 

@Karli F. you might look into whether you need to pay the tenant 3% interest on the money you are holding. A simple google search showed deposits held must accrue interest so I assume last months rent would too. 

So you will be paying to hold the funds. Maybe consider if the cost is worth it ? 

I understand what your saying. I didn’t mean it as a double deposit. It still covers last months rent, so when that day comes, it is paid. But there is nothing against holding it. I didn’t know about the 3% rule. That is interesting, and makes it totally not worth it. Thank you for clarifying.

@Mary M. In Minnesota, I'm sure it's 1% interest for security deposit and only the security deposit. They can't make you pay out interest on a rent payment.

@Alyssa Strom

Thanks for your golden nugget about credit score screening being disallowed! Can I ask how you stay on top of changes like that? Are you proactively searching, have a keyword alert, signed up for municipal updates, is the word making the rounds of the local REIA etc? I'd like to fold something like this into my systems.

@ThomasRoy Penland

"Major companies play this game every day to protect themselves. If you want to play with the big kids, play the same games."

Agreed! Along the same lines, set up systems and tools today as if you were playing in the bigs, at least to the best extent possible. You'll gain traction and leverage to support future growth.

@Ashley C. I wish there was an easier way but I've found local investor/landlord groups are one of the best ways to keep up to date on local changes. I was personally aware of the Saint Paul changes because they asked for public comment (not that it mattered) about a year ago. If you've got a St. Paul property there are some other additional changes to be aware of as well. https://www.stpaul.gov/departm...