The Difference Between a Security Deposit and Last Month’s Rent

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When a new tenant moves into your property, it’s time to start generating income from your investment.

And not just from the first month’s rent – you have two other instant revenue options as well: the last month’s rent and the security deposit.

Both of these are excellent ways to test a tenant’s financial stability and sincerity about renting your property for the long term. However, they’re not mutually exclusive. If you wanted, you could charge for both, one, or neither.

You need to understand the differences between charging last month’s rent and collecting a security deposit to make your decision on what you’ll ask for. Today, we’ll explore those differences.

 

How a Security Deposit and Last Month’s Rent Are Different

What is a Security Deposit?

A security deposit is a tenant’s property, and it should be held for a tenant for the duration of their tenancy.

It’s typically an amount equivalent to one month’s rent, and is intended to cover any damages beyond normal wear and tear to a property.

“Normal wear and tear” is pretty straightforward – if the carpeting shows signs of use, then that is considered “normal.” Carpeting covered in large stains, on the other hand, would not fall under the definition of “normal wear and tear.”

If, when a tenant moves out, a landlord finds that damage beyond normal wear and tear have occurred, the landlord doesn’t have to legally return the security deposit.

You should collect the security deposit before the tenant actually moves into the property. You should also be sure to include the amount of money and the date the security deposit was collected in your lease agreement.

Maryland landlord-tenant laws state that a landlord may charge a tenant up to the equivalent of two months’ rent for a security deposit. Montgomery County landlords must also provide a receipt that describes the tenant’s rights to inspections, the right to receive an itemized list of the deposit deductions, and the penalties for the landlord’s failure to comply.

On top of that, Montgomery County landlords must pay interest on any security deposit $50 or more at an annual rate of 3 percent. You can calculate your tenant’s security deposit with added interest on the Department of Housing and Community Development website.

Landlords are required to return their tenants’ security deposits within 45 days after they move out, as long as both parties met the agreements outlined within the lease. If a landlord fails to return any part of the security deposit within that period, they could face a lawsuit and may be liable for three times the withheld amount.

 

What is Last Month’s Rent?

If you require your tenants to pay a last month’s rent, you effectively give yourself a form of insurance against their leaving without giving you proper notice.

Think about it this way: if a tenant signs a one-year lease, they won’t have to make any payments during their twelfth month of tenancy.

Collecting last month’s rent is also a great way to attract higher quality renters. Such a barrier for entry allows only those potential tenants with the appropriate cash on hand to move in. Because it can be so difficult for someone of lesser means to move into a new home and pay such a substantial cost, you’ll have significantly fewer (but probably higher-quality) applicants overall.

Just remember, if a tenant has reason to legally breach their lease agreement before the twelfth month, then you would be obligated to return their last month’s rent. Instead of finding yourself simply needing a new tenant, you’d also be a full month’s rent in the hole.

For a more extensive look at last month’s rent, check out this recent blog post.

 

What’s the Big Difference?

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The biggest difference, clearly, is that you don’t have to return the last month’s rent. That isn’t the tenant’s property – it’s yours.

The security deposit is not actually “income,” but keeps you free of any financial headaches after a tenant moves out. But if you can’t legally hold onto it, you have to return it within that 45-day period.

Because a last month’s rent is part of the overall money owed by the tenant, it doesn’t technically count towards anything other than your tenant’s cost of living in your property. This forces you to pay for any cleaning or repairs needed at the end of the lease.

Your best bet to keep yourself safe and flexible is to require tenants pay a security deposit, and to follow the Maryland state laws on handling the money. The deposit should be as high as you think necessary to cover whatever potential losses you could face.

 

“Living Out” a Security Deposit

Sometimes, your tenant may try to “live out” their security deposit. Instead of paying their last month’s rent, they ask you to apply the security deposit you’ve already collected from and owe them to their last month of rent.

This can be somewhat risky for landlords. For instance, if your tenant has caused any damage to the property, you probably won’t have enough security left over after you deduct their last month’s rent to pay for the damage they caused. If your security deposit was only the equivalent of one month’s rent, this is especially true.

The best advice in this case is to never allow your tenants to live out their security deposits. If you did not require a last month’s rent when they moved in, collect the last month’s rent as you normally would and return them their security deposit within the legal period minus any necessary deductions.

 

Increased Rent Amounts and Last Month’s Rent

One issue Montgomery County property managers might run into when they choose to collect last month’s rent is the issue of increasing the amount of rent due.

If you increase the rent due every month but fail to require your tenant to increase the amount of their pre-paid last month’s rent, you can’t collect the extra amount when the tenant moves out.

When the tenant moves out, there will be a difference in what they initially paid as last month’s rent, and what the actual last month’s rent costs. But you cannot make the tenant pay the difference.

This may not be the most upsetting outcome – especially if the amount you raised the rent was small enough that its absence doesn’t impact your finances.

 

Final Thoughts

The differences here are pretty clear: a deposit is always helpful, and a last month’s rent can be as well. And whether you want to ask for both, one, or neither is entirely your decision.

Take a step back from your business for a moment, and ask yourself:

What sort of tenants will my properties most likely attract? What sort of tenants do I want to attract?

The answers to these questions are different in every individual case. What’s important is that you understand these differences and decide what you should do to grow your rental property business.

 


How Can I Painlessly (and Legally) Raise the Rent?

How to Increase Rent in Maryland without Issues with Tenants

As a landlord, you undoubtedly already know that high tenant turnover can be costly. It’s much easier and cost-effective to retain good tenants than it is to advertise your property and try to find new ones.

But what happens when you need to raise the rent?

Whether you want to do it because of property value changes, taxes, improvements you’ve made to the property, personal needs, or another valid reason, you shouldn’t have to feel anxious about it.

Sometimes, that’s easier said than done. After all, rent raises can upset even the most reasonable tenants, and you don’t want to end up losing them.

The good news is that, by following a few simple steps, you can likely keep your tenants around when the rent goes up.

Here’s how you can both legally and painlessly raise the rent in Anne Arundel County and the surrounding Maryland areas:

 

Tips for Keeping Tenants Happy While Raising the Rent

Build a healthy tenant/landlord relationship

Think about it – it’s a lot easier to forgive someone you like than it is to forgive someone you can’t stand. This applies to all kinds of relationships, including the tenant/landlord relationship. If you’ve already spent time cultivating a happy relationship with your tenants, they should be a lot more understanding when the time comes for you to raise the rent. Plus, getting to know your tenants personally makes it easier for you to know the best possible way to approach them.

Anne Arundel County Property Manager Speaking with Tenant

 

Be honest with your tenants

An uninformed tenant might assume that you’re raising the rent because you’re greedy and want to squeeze every penny possible out of them. It’s your job to let the tenant know that that simply isn’t true and explain the real reason you’re raising the rent.

Tell them how the rent being too low is negatively affecting your business or explain that costs have gone up and then share how the new rent rate reflects those costs. Just make sure you have the numbers to back up your claims if a tenant asks for details – you don’t want to end up looking dishonest.

While this step isn’t absolutely necessary, humanizing the increase can help make the transition to a higher monthly rent easier for a reasonable tenant. They might not be happy about the increase, but at the end of the day, they should understand that you’re just doing your job and that it doesn’t make good business sense for you to undercharge the tenants living in your properties.

Let your tenants know that rent increases won’t be a common occurrence

If you can promise your tenants that you won’t increase the rent again for a specified amount of time, this is the perfect chance to do it. By letting them know, you’ll encourage them to stick around for at least that amount of time because they’ll feel secure knowing that they won’t end up paying more monthly than they already are any time soon.

 

How to Legally Raise the Rent in Maryland

In Maryland, specific laws apply to landlords who are looking to raise the rent. For example, Maryland landlords are required to let tenants know at least one month ahead of time when the rent is going to increase. In certain counties (Montgomery County, for example), a two month notice is required, so be sure to research your local laws in addition to the Maryland state laws before you raise your tenants’ rent.

Another notable law for Maryland landlords states that, when tenants have a long-term lease, the landlord can’t raise the rent until the lease ends and a new resident begins their tenancy in the property. Plus, landlords can’t ever raise the rent because of discrimination against a tenant’s race, sexual orientation, or religion. Landlords must also avoid raising the rent in retaliation against a tenant who has complained to the city about a code violation.

Keep all of these laws in mind (as well as your local laws and any other applicable laws), and then you can follow this process to raise your tenants’ rent:

  1. Write a rent increase letter. The letter should include the tenant’s name, the current rent amount, and the new rent amount. It should also include your signature and let the tenants know when their lease will end if they choose not to renew.
  2. Consider including the reason for raising the rent if you think it will help ease any future conflicts with the tenant. Doing so might make your tenants more likely to sympathize with you and see the rent increase from your perspective.
  3. Attach a new lease to the letter and highlight where the tenant needs to sign/initial if they want to renew. Let them know when they should get the new lease back to you.
  4. Send the letter/lease to your tenant. You may want to verify that they received it to avoid any disputes in the future.

Tenants Speaking with Anne Arundel County Property Manager about Rent Increase

Be sure to let the tenants know in your letter that you have enjoyed having them as a resident and hope that they choose to continue their tenancy with you. While this might seem like an insignificant action, a little bit of friendliness can actually go a long way when you’re raising the rent!

If you would like assistance with unwanted landlord responsibilities, consider partnering with our Anne Arundel property management team.

Dealing with tenant conflicts and the daily tasks associated with being a landlord can be tough, but we’ve got the experience necessary to assist you when you need it the most.

We can help you with rent collection, evictions, rental registration, inspections, maintenance, move-in/move-out reports, tenant screening and more. We also send you a monthly statement that shows how much you made from each of your properties so you can easily keep track of your landlord business’ profitability.

So, if you have a property located in Annapolis, Severna Park, or other areas around Anne Arundel County, we’d love to help you get the most out of your career as a landlord. Contact our team today!

 


Understanding Normal Wear and Tear on Montgomery County Rental Properties

A question frequently asked by both tenants and landlords is what constitutes normal wear and tear on a rental property.

Both parties of a rental agreement often have their own definitions of what “normal wear and tear” means, leaving much room for conflict at the end of a lease agreement.

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The term “normal wear and tear” is a vague one and can cause a lot of issues between you and your tenant if not spelled out clearly in the beginning of a lease agreement.

In order to minimize disagreements over the condition of your Montgomery County rental property at the end of a lease, let’s take a look at who is responsible for what in a rental property.

 

What Exactly is a Security Deposit?

It is important first to have a solid grasp on what exactly a security deposit is. According to the Maryland State Code a security deposit is

“… any payment of money, including payment of the last month’s rent in advance of the time it is due, given to a landlord by a tenant in order to protect the landlord against nonpayment of rent, damage due to breach of lease, or damage to the leased premises, common areas, major appliances, and furnishings,” in excess of ordinary wear and tear.

 

This is where the main conflict occurs. All states allow landlords to collect a security deposit (which is usually in the amount of one month’s rent), but this money is to be returned to the tenant at the end of the lease so long as the property is left in its original condition minus normal wear and tear.

Many landlords are under the impression that a security deposit is a payment of money that can be used at the end of a lease agreement to restore their rental property back to its original condition before their tenants moved in, improve the condition of the property for future tenants, or even prepare it for sale.

This is simply not the case.

This money is to remain in an escrow account at all times and is always considered your tenant’s money until a situation arises where you can legally access and use such funds. In fact, if you were to use your tenant’s security deposit for legitimate reasons, the work must be shown to have been done by licensed contractors and receipts must accompany whatever charges were incurred.

 

Normal Wear and Tear vs Damage

Although seemingly ambiguous, the term normal wear and tear is actually quite simple. When agreeing to lease a rental property from you, the tenant is knowingly obligated to return said premises to you, their landlord, in substantially the same condition, as when the tenant originally moved in.

Deterioration without negligence, carelessness, or abuse of the premises is not considered your tenant’s responsibility and you cannot require the tenant to be financially responsible for normal use of your rental home. However, if the tenant has been negligent, abusive, or made accidental damages to your property (either personally, by guests, or even pets), then you would have a case for damages to your home.

 

Let’s get a better idea:

 

Normal Wear and Tear – Landlord is Responsible Damages – Tenant is Responsible
Loose or worn hingesDetached hinges
Scratched window surfacesBroken or missing window panes
Faded or dusty curtainsTorn, stained, burned curtains
Small holes or marks in wallsLarge holes or dents in walls
Faded or worn carpetingTorn, stained, burned carpeting

 

Helpful Tips

Landlords and tenants are encouraged to work together when it comes to routine maintenance and upkeep of the rental property in use. When each party is aware of such responsibilities from the beginning, it is easier to determine who is responsible for what at the end of the lease agreement.

Landlords

routine-property-management-maintenance-protects-homeRoutine maintenance of your Montgomery County rental can prevent problems during your tenant’s stay. By staying on top of small fixes ahead of time, there is less likely a chance for something to go wrong during your tenant’s lease, and less likely to be a conflict over who is responsible for fixing it in the end.

Another important point is to have an understanding with your tenant as to what their routine maintenance responsibilities will be while renting your home. This could include things such as changing batteries and lightbulbs, replacing filters, or having the pool cleaned on a regular basis. These are things that should be included in your rental agreement with your tenant so that there is no confusion as to responsibility should something break due to a lapse in routine maintenance.

This can become very overwhelming especially if you own more than one rental property. Remember, your Montgomery County property management group is there to stay on top of all your routine maintenance needs for your rental properties so you can have the peace of mind that your home is taken care of. This also includes drafting up a thorough lease agreement so each party knows exactly what is to be taken care of and when.

  • Invest in Quality Appliances

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Keeping older appliances in your rental home increases the risk that something may break and potentially damage your rental property.

Using newer and more dependable appliances not only decreases those risks, bur makes for a happier tenant all around.

  • Maintain Basic Amenities

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It is your responsibility to maintain things such as electricity, hot/cold water, and plumbing to all of your rental homes. If these amenities are not kept in good working order, and damages were to occur, it could very well be your responsibility.

By avoiding such things in the first place there is less chance of a conflict occurring over who will pay for what damages.

 

Tenants

  • Schedule Walk-Throughs

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Before moving into your new home, make sure you have a walk through with the landlord to get an idea of the existing state of the property. Make note of all problems that need fixing and even consider taking photos, even if it is a minor issue.

At the end of the tenancy schedule another walk-through to note any changes that may have occurred during your stay. This gives you the opportunity to fix any issues that are your responsibility before the landlord charges you.

  • Get Things Fixed

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As soon as a maintenance issue arises that is your landlord’s responsibility,fix it sooner than later to prevent damage. Waiting to have things fixed may be regarded as negligence and a case for damages might be considered.

Don’t let problems that can be fixed go from normal wear and tear to damage due to procrastination.

  • Upon Move Out

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When you prepare to leave a rental home it is expected that you leave the property in good, clean condition, minus normal wear and tear.

Do things such as clean the entire home, remove all personal items, sweep and vacuum floors (even consider having them professionally cleaned), replace all batteries and light bulbs.

Just make sure that everything you fix (i.e. patching any nail holes or spackling the walls) was agreed to in the lease agreement. This should be discussed at the start of tenancy so the understanding is clear.

 

Conclusion

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The term “normal wear and tear” is a hotly debated topic.

When a landlord leases their property out to strangers, it is worrisome that damages may occur to a property they have invested in. Unfortunately, that is the risk you take when becoming a landlord.

As long as the tenant has not been proven to have been neglectful, abusive, or careless, damages to your rental property are not their responsibility.

This is why it is important to have a solid lease agreement from the start where each party is undeniably certain of what their responsibilities are.

When you want to rent out your home, give Bay Management Group a call.   As your reliable Montgomery County property management company, you can be assured problems arising from the term “normal wear and tear” will be a thing of the past.