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The Pros and Cons of Collecting Last Month’s Rent

Choosing the perfect tenant for your rental property is just one of the many decisions landlords must make before the move in. Most property owners are familiar with charging new tenants the first month’s rent and a security deposit. However, the question remains – should you collect last month’s rent as well? This is something that requires careful consideration, as there are both advantages and disadvantages to doing so. Continue reading as we define what is last month’s rent, what is it used for, and is it the same thing as the security deposit? That way, landlords can come to a final decision and be confident it is the right one.

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What is Last Month’s Rent Used For?

In short, last month’s rent is just that, a collection of money equal to one month’s rent. The purpose is to pay for the monthly rent due during the last month a tenant resides in your rental property.  Therefore, these funds can only apply to the monthly rental dues, whether collected directly from you or your property management company.

If a lease agreement dictates that last month’s rent is due at the lease signing, and the tenant pays accordingly, no rent will be due at the end of the lease term. Additionally, if you decide to renew your tenant’s lease agreement, this payment typically carries over into the new term. It will then apply to the final month when the tenant is ready to move out.

What is the Security Deposit?

A security deposit is a payment made by the tenant at the beginning of the tenancy to protect against damages and breach of the lease. Though you may have a general idea of what a security deposit is based on what has already been discussed, here are a few key points to remember:

  • A collection of money made payable to the landlord directly or property management company that is usually equal to one month’s rent.
  • If the rental property is located in the Howard County area, property owners may request a security deposit equal to two months’ rent.
  • This money protects the landlord financially from non-payment of rent, breach of the lease agreement, or damage to the rental property.
  • Should any damages occur or rent payments go unpaid, this money can then be used to supplement the landlord’s financial loss.

Why is Last Month’s Rent Often Confused with Security Deposit?

It is not unusual for landlords and tenants to confuse the terms ‘security deposit’ with ‘last month’s rent.’ Unfortunately, the amounts for each are usually the same, which only adds to the confusion. That said, you must understand exactly what that ‘last month’s rent’ means before deciding to collect it.

Therefore, to avoid confusion, it is important to outline the collection of each in your lease agreement thoroughly. Before signing, ensure tenants also understand the uses and definition for each. Let’s take a look at some of the most common misconceptions surrounding last month’s rent versus security deposits below.

Landlord Misconceptions

  • Landlords believe they can use last month’s rent for the same reasons a security deposit can, such as non-payment of rent or damage to the property. Instead, the only proper use is paying for the last month’s rent designated in the lease.
  • Landlords believe they can charge a new tenant first month’s rent, a security deposit up to the maximum amount, and last month’s rent. However, many states consider last month’s rent collection as part of the security deposit as it relates to collection limits. In other words, a landlord cannot collect the first month’s rent, the maximum-security deposit limit, and last month’s rent.  Instead, the security deposit maximum must be split between the deposit and last month’s rent.

Tenant Misconceptions

  • Tenants believe they can apply a security deposit to their last month’s rent. However, unless expressly written into the lease agreement, this is not the case.

Pros of Collecting Last Month’s Rent

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As with so many of the decisions landlords must make, there are pros and cons to consider. Continue reading below as we look at a couple of pros for collecting last month’s rent.

  1. Quality Tenants
  2. Additional Landlord Protection
  3. Extra Upfront Cash

Quality Tenants

If your rental property is located in the affluent area of Ellicott City, chances are your property has a significant value. So, by collecting first and last month’s rent, in addition to a security deposit, landlords are more likely to attract high-quality tenants. Additionally, by providing the total amount upfront, the tenant is showing they are financially responsible. Thus, the chances of missed or late rent payments are likely lower.

Additional Landlord Protection

Collecting last month’s rent adds an extra layer of financial protection for property owners.  So, should your tenant stop paying rent, you are already one month ahead.  Plus, you have the security deposit collected for issues such as non-payment of rent that you can now apply to any additional loss you experience.

Some tenants will try to ‘live-out’ their security deposit by not paying for rent and just letting the security deposit pay for the non-payment.  Not collecting last month’s rent in advance leaves the landlord in a bind, especially if the tenant owes any excess beyond the security deposit for additional non-payment or damages.  You are now looking at a day in court that every property owner tries to avoid at all costs.

Extra Upfront Cash

It is not uncommon for tenants to think they can use the last month’s security deposit and skip out. So, this added cushion of collecting funds upfront allows landlords to rest a little easier. Having both security and last month means that if the tenant does skip, landlords have enough to cover the rent as well as possible damages. This is especially beneficial in a state where landlords can only charge one month’s rent as a security deposit.

Cons of Collecting Last Month’s Rent

Every advantage has a disadvantage, and collecting last month’s rent is no exception. Therefore, read on as we uncover a few cons every landlord should consider before making their decision.

  1. Smaller Tenant Pool
  2. Rent Increase Dilemma
  3. Limited Flexibility

Smaller Tenant Pool

Moving is a significant expense for anyone. Therefore, the first and last month’s rent plus a security deposit is a lot of money to ask for upfront, even in the well-to-do area of Elkridge.  Some tenants may struggle to come up with the first month’s rent and security deposit without last month’s rent added into the mix.

This can affect the number of qualified applicants in your tenant pool. While asking for last month’s rent may get a better-quality tenant, it could also extend vacancy time. Landlords must carefully weigh whether asking for additional upfront funds is worth potentially taking longer to secure a move in.

Rent Increase Dilemma

What happens if you want to increase the monthly rent on your rental property?  If the original last month’s rent was $1000 and the new rate is $1200 a month, the difference must be collected. Failing to collect this additional amount at the time of increase could prove a loss for landlords. Keep in mind; you will not be allowed to collect the difference when your tenant moves out at the end of their lease term.

This is why proper rent collection and renewal procedures are critical to success. Unfortunately, asking for these additional funds can put a strain on the landlord-tenant relationship. Therefore, approach the subject professionally and with as much notice to the tenants as possible.

Limited Flexibility

Landlords who collect last month’s rent can only use it as such. In contrast, a standard security deposit can go towards lost rent or tenant damage at the end of the lease. So, it is better to collect a general security deposit in line with your state’s limitations. In turn, this offers property owners more flexibility in how funds get disbursed.

Is Charging Last Month’s Rent a Good Idea?

Every landlord, property, and tenant presents a unique set of circumstances. Therefore, what works for one may not work for another. So, property owners must carefully weigh their options before requiring last month’s rent as part of their rental agreement.

Many landlords worry that tenants will simply skip out on the final month for several reasons. While it is true that this can happen, is charging the last month’s rent upfront the best option? How can landlords protect themselves from tenants trying to skip their final month’s rent obligations? The answer lies in a solid legal renal agreement.

A rental lease is the most important document between a landlord and a tenant. In it clearly address the financial repercussions should the tenant decide to vacate early. These early terminations or lease break policies serve as a deterrent to tenants while simultaneously protecting landlords. No matter what the lease term may be, always require tenants to provide a minimum of 60 days’ notice.  Doing so ensures property owners can jumpstart the inspection process and begin marketing for new tenants.

With many pros and cons, collecting last month’s rent will continue to divide the industry for the foreseeable future. That said, experts agree that one solution to alleviating skipping tenant fears is to collect a larger security deposit. For example, if your state allows landlords to charge more than one month’s rent as a security deposit, this is better than collecting last month’s rent. That way, the extra money you collect can cover tenant skips.

Final Thoughts

Last month’s rent is money paid by your tenant to live on your premises.  The security deposit is your financial protection against any unforeseen non-payment or damage.  Whether you choose to collect last month’s rent at the start of their lease term is up to you.  Just make sure that you enlist the help of a Howard County property management company. Bay Property Management Group is here to help you with a lease agreement that makes all your rent collection procedures clear. This helps avoid unnecessary confusion for both owners and tenants alike while protecting your valuable investment. Call us today to speak to one of our dedicated team members!