Should you collect first month’s rent, last month’s rent and security deposit when a tenant moves in? Sounds pretty good but is it. The answer coming up.
Should you collect first month, last month & security deposit? No. This is not a good idea. There are a few problems with this, and I’ll get into them as well as what you should do.
Okay let’s go over all the problems with collecting first, last & security. It can be complicated and work against you. Let’s start with that’s a lot of money for the tenant to come up with to move in. What’s likely to happen is you’ll end up collecting a smaller security deposit up front. The most security deposit you’re going to get with this method, if you’re lucky, is one month’s rent.
The next problem with collecting first, last and security is the landlord must keep the last month’s rent in a separate escrow account (just like the security deposit). It can’t be spent and it must remain in an escrow bank account until it’s used.
Next problem, and this a biggie, the last month’s rent is taxable when received (that first year) because it’s considered prepaid rent. That’s right, even though you can’t use it or spend it yet, you have to pay taxes on it. Next, and here is where it gets bad, when you do eventually use the funds for the last month’s rent, you have to remember to deduct that amount from your taxable rent in the year that you use it. If you forget to do this you’ve just been double taxed, and the government is going to steal more from you.
Let’s continue with the problems of collecting first, last and security. Okay the tenant is moving and you can finally use the funds for the last month’s rent. But chances are, you don’t have the full last month’s rent. Why, because if your tenant has been in the property for years (and they should), there was most likely rent increases, and the last month’s rent that you collected years ago is probably a lot less than what the rent is now. Now you must explain to the tenant that they still owe for the last month’s rent when they think they already paid it.
Okay, so what should you do? We collect the first month’s rent and a larger than normal security deposit, but not the last month’s rent. Let me explain why this is better. First, you want to collect the first month’s rent (for a full entire month) no matter when the tenant moves in. If the tenant moves in other than the first day of the month, you prorate the second month. For example, say the tenant moves in halfway in the middle of April. You would collect the full rent for April, an entire month, then the next month in May, you would collect half, the prorated amount, then in June it would go back to the full amount. The reason for this is you want as much rent as possible from the tenant when they first move in.
Next, you collect a larger security deposit in full at move in. You want the security deposit to be as large as possible. More than one month’s rent. The security deposit should be anywhere from a month and a quarter (at a minimum), to two month’s rent. The reason is simple, the more security deposit you have, the better the house is going to look when the tenant vacates. But what about the last month? The tenant simply must pay the last month’s rent when it becomes due. The end.
So, if you want a good house back and avoid all the complexities of first, last, and security, when a tenant moves in, collect a full month’s rent and a larger security deposit.
I’m Michael Bielon, if you need property management in the Tampa Bay area or any help with your property, please reach out to me. Thank you for watching.
