Landlord guide: Larger deposits vs. last month’s rent

Most savvy real estate investors will tell you that their ability to provide tenants with the best living experience boils down to one rather important detail: their respective bottom lines. Because many of us probably would attest to what it costs to live on this great planet, it’s seems fair then to assume that, when a landlord is managing more, like multiple properties, it’s a given his/her expenses will be greater as well.

Which is why the idea of collecting a larger deposit as opposed to last month’s rent was a hot topic among property owners in 2016, creating a bit of debate centered on the idea of more cash upfront vs. less headaches at the end of a lease.

In that sense, the most obvious advantage to getting a sum of money on the front end is a certain comfort level with renting your property. Some tenants, however, might indulge in the loose concept of living the security deposit out in such a way as to cover the cost of their last month’s rent. Of course, this is typically an effort to have enough cash for their move.

But there are always those extreme cases when using the security deposit to cover last month’s won’t work in the landlord’s favor – due to damages that far exceed what the deposit will actually cover.

Now, when it comes to the disadvantages of collecting cash upfront, we find the challenges tend to outweigh the risks, making the top three cons of this issue read a little something like this:

1) Not enough cash on hand – Most tenants will have a fairly depleted bank account upon moving in and just won’t have the means to pay first month’s rent, a security deposit, and last month’s. This puts the landlord in the position of having fewer options. And even if the tenants have the cash to fork over for all three, it might be that one of your competitors doesn’t charge last month’s rent, meaning your rental market is smaller.

2) Tricky situations – Don’t get yourself in a position, either, where things could get rocky between you and your tenants, because, for example, you sell your property, have to increase the rent or find yourself in the precarious position of having to explain dodgy practices on the part of the accountant you just fired. This only complicates the matter.

3) Landlord’s loss – Finally, you won’t have as many options available to you in regards to spending the last month’s adequately, if the property damage winds up costing you more than you got. That sets the landlord up for what could turn out to be a loss that keeps building over time.

So what’s the solution then?

It’s simple: Depending on where you live, charging more than one month’s rent as a security deposit will most likely serve you better than collecting last month’s rent. But certain states have stricter laws on what tenants are required to pay, so make sure you check first, before making the leap to a larger security deposit.