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Should I Charge “last month’s rent”?

Landlord Advice

When you rent out a place there are certain ways to break a deal. You can either only take the security deposit or the security deposit plus the last month’s rent. While most prefer to keep the last month’s rent in advance, it has some advantages and disadvantages. Let’s look at the situation in details.
The advantage of collecting money from beforehand is basically guaranteeing the last month’s rent. It gives you a peace of mind in knowing that your tenant won’t be able to cheat you in any way. It happens quite often that tenants suddenly leave without informing or paying their landlord their dues. Here, the landlord stands at a loss and taking the last month’s rent in advance can save you in this situation.

However, a closer look at some common facts reveals that there are many downsides to this option. First, you need to understand that a tenant is bound to pay some security deposit for unforeseeable damage repair. It is taken for a totally different reason and doesn’t count as rent. It may be damage to the wall, or flooring or the door and its definition depends on landlord’s policies. In such a case of damage, the landlord is free to use this security deposit money to repair the damages.

Taking your money as a deposit + rent together will complicate its legal definition. By the terms of the law, you cannot use this money, which has a rent part to it, on any kind of repair. Technically, it becomes rent money which is to be used only for the last month’s rent and not on anything else. This means that any repair for wear and tear will have to come out of the landlord’s own pocket. The money in some sense will just be a frozen asset until the tenant shifts out.

Last Month’s Rent and Rent Increase

This is another problem that many landlords often face. As housing prices and rent are dependable on a lot of factors, they are bound to change over time. If a landlord is pre-paid with some fixed amount of last month’s rent, he can’t charge extra on top of it, when he increases his rent. That amount is considered as a present day value rent, payable in future. Any increase in rent will have to be marked off as loss by the landlord.
For a simple example, suppose a landlord gets a tenant in January for $100. The tenant initially pays a $100 extra, besides security deposit, as the last month’s rent payment. By the end of July, the landlord had to increase the rent to $150. Though, he will be collecting the extra $50 from the tenant for every month he lives, for the last month the tenant will simply not pay anything. The landlord can now withdraw only the $100 the tenant deposited at the beginning, Thus, here the landlord simply loses $50.

States and Legality

Different states have different rules regarding security deposits. The landlord is not bound to show the last month rent money in his/her bank account but does have to give the tenant an annual interest on it. But, in some states, the landlord is required to deposit the security money in escrow accounts. The rules regarding interest payment on these accounts also differ from state to state. It’s a good idea, for both landlords and tenants, to thoroughly go through the laws of the particular state concerned and not go by what’s generally accepted.

Conclusion

Landlords should separate each of the reason for taking the money and the specific amount against each reason. If you are renting out a place, stay on the safe side of things and make the security deposit as high as the regional law permits. First, you need to draft a healthy policy with clear terms of damages. You will only be able to use the deposited money for repair if your policy speaks of it in legal terms. So be careful while planning it and try to think of any kind of liability associated with the property.

You also need to understand that without any kind of damage, the landlord is bound to pay back the deposit money to the tenant. If you are planning on using the label of “last month’s rent”, forget it. It actually sums up to be a loss making decision.