When finding the perfect tenant, many landlords worry about their screening process or look for staging tips. However, there are specific criteria you can put in place to help you find financially stable tenants.
Whether a newbie or seasoned landlord, you’re probably familiar with charging new renters the first month’s rent and a security deposit.
However, did you know you can also charge last month’s rent?
You’re at the right place if you’re unfamiliar with how that works and need some clarity. This article answers the question, what’s the difference between a security deposit and last month’s rent.
By the end of this post, you’ll understand the distinction clearly. You’ll also know the pros and cons of charging last month’s rent, which can help you make better financial and tenant decisions.
What is Traditional Security Deposit vs. Last Month’s Rent
A traditional security deposit is a fee tenants pay their landlords at the start of a new tenancy. The purpose of that fund is to protect property owners against damage or lease violations caused by the renter.
On the other hand, last month’s rent refers to a monthly fee to cover living costs for the final month of a tenancy. Since the prices for both deposits are often the same, it’s not uncommon for people to hold misconceptions about them. However, they are distinct, and each has its purpose, pros, and cons.
If you are unsure what you should do for your rental, Bay Property Management Group Washington DC can help you choose the best deposit options to protect your interests.
PROs of Charging Last Month’s Rent
It Helps You Identify Financially Stable Tenants
If you have reservations about financially unstable tenants, charging last month’s rent could help you identify your best options. The logic behind this is that if a renter can afford to pay their first and last month’s rent, they must be pretty stable.
In addition, remember that they also have to pay a separate security deposit. Thus, such tenants are less likely to have issues with late or missed payments in the future. Hence, we can say that this additional criterion makes it easier for landlords to spot high-quality tenants.
It Provides Added Protection
Another benefit of collecting last month’s rent is that it gives you a financial cushion to fall back on when needed. Although asking for a security deposit is the standard practice in real estate, it isn’t always enough.
For example, if the deposit you charge is equivalent to a month’s rent, one delayed payment will take that. Consequently, there will be nothing left in the fund to cover tenant damage or missed rent. However, the law allows you to cover such costs with the additional cash you collect as last month’s rent.
You Earn Extra Upfront Cash
Security deposit laws vary from one state to the next. However, most states only allow landlords to charge the equivalent of one to two months’ rent. Considering the security deposit has to cover several expenses like missed rent and necessary repairs, it’s easy to exhaust it. However, making last month’s rent inclusive puts you at least two months ahead.
Cons of Charging Last Month’s Rent
It Caps Your Rent
One of the benefits of owning real estate is that it hedges inflation by adjusting market prices. Thus, landlords can increase the rent when external factors influence the market accordingly.
However, charging last month’s rent upfront introduces a dilemma. For example, if your rental costs $1000 a month at the beginning of the year, new tenants would have to pay $2000 plus their security deposit.
Unfortunately, if your rental expenses increase, making $1300 a fairer market price for your condo, you’ll be unable to collect the additional amount because of your lease.
However, you might be lucky to break even without the difference, especially since you still need to fulfil your landlord duties. In other words, you can’t cut money on essential utilities and vital repairs unless you want to risk a lawsuit.
It Reduces Your Potential Tenants
Another disadvantage of charging last month’s rent upfront is that it reduces your potential applicants. For tenants living paycheck to paycheck, coughing out the money for two months’ rent and a security deposit is unthinkable.
Thus, it would not be a realistic rental standard unless your property is a middle-upper class area. Even then, many prospective renters would still be apprehensive about committing so much money. Consequently, such a policy can deter qualified tenants from signing a lease with you.
It Has Limited Use
Despite earning some extra upfront cash, there’s still a limit to what you can do with it. If you collect a specific fee from a tenant for ‘last month’s rent,’ the law only allows you to use it for that purpose.
In other words, if you need to make repairs due to tenant damage, you can only dip into their security deposit. If you exhaust those funds, you cannot legally use the last month’s rent as a cover. The state’s limitations on such policies are too rigid to allow room for other expenses.
We asked the question, what’s the difference between a security deposit and last month’s rent?
While a security deposit is a refundable fee to cover damages or lease violations, last month’s rent can only cover the final rent of a tenancy. Charging the latter fee can help property owners identify financially stable tenants and provide added protection.
However, it prevents you from increasing your rent as needed and can reduce your tenant pool. Thus, before adopting such a policy, you must carefully weigh the pros and cons.