When tenants move in, you can collect several funds, such as the first month’s rent, security deposit, and final month’s rent. By collecting these amounts, you’ll be able to protect your property in case of non-payment of rent, property damage, and more.
But the ability to collect doesn’t always mean you should collect. Below, we’ll talk about the pros and cons of collecting the final month’s rent from your tenants.
Why Collect the Last Month’s Rent?
It’s not uncommon for rental property owners to collect the first month’s rent. However, were you aware that you can also collect the last month’s rent?
When you collect the first and last month’s rent from your tenant, you collect funds that will cover up to two months’ rent. That way, when it’s time for your tenant to move out, you already have the money to pay for their last month’s rent. While you don’t have to do this, it can protect you in case your tenant fails to pay their last month’s rent.
Is the Last Month’s Rent the Same as the Security Deposit?
No. These two are distinct. When you collect a security deposit, you can only use that amount to cover the costs of repairs or for non-payment of rent. If there are no repairs or the tenant has paid all of their rent in full, it should be returned to the tenant.
The last month’s rent is exactly what its name implies. It’s an extra amount separate from the security deposit and is used to fund the tenant’s final month of tenancy. It’s rent that your tenant will eventually have to pay, however in this case, you’ve collected it in advance.
Be Sure to Include It in the Lease Agreement
If you decide to collect last month’s rent, you need to include it in the rental contract. Adding it to the lease agreement is the only legal way to do it. It should clearly state that you, the landlord, can only use the amount to pay for the tenant’s final rent. In addition, it should state that the amount is due at the lease signing.
To draft a fool-proof lease agreement, consider consulting a South Florida property management company.
What Are the Pros of Collecting the Last Month’s Rent?
There are advantages and disadvantages to consider, as with all of the decisions that you face as a South Florida landlord. Below are the benefits of collecting the final month’s rent from your tenant:
Financially Stable Tenants
If a renter can afford to pay the final month’s rent upfront, that is a sign that they are financially stable. With that said, by collecting the final month’s rent, you’ll be able to attract good tenants. It also shows you that the tenant is less likely to miss their due dates and that they will pay their rent promptly. Willingness to pay the amount is also a sign that your tenant intends to stay throughout the entire length of their lease agreement.
When you collect the final month’s rent, you can have peace of mind, knowing that if your tenant fails to pay their rent, you’ll have the funds to pay for it. Furthermore, the security deposit that you collected for repairs, non-payment of rent, etc. can be used to offset any additional costs that you incur.
For some South Florida landlords, collecting the final month’s rent is more secure. Some renters will rely on their security deposit to cover their final month’s rent, and while this situation is allowed, it puts you at risk. What if they fail to pay their final month’s rent and the property is in poor condition when they move out? How will you be able to pay for repairs if you already used the security deposit to pay for their rent?
What Are the Cons of Collecting the Last Month’s Rent?
Collecting the final month’s rent may seem 100% advantageous, however, there are certain disadvantages to consider, as well:
Smaller Tenant Pool
Charging the first and final month’s rent, as well as the security deposit, can reduce your applicant pool. Not every tenant will be willing and able to pay for two months’ worth of rent as well as any other fees you may collect (e.g. pet fees for pet-owning tenants). With that said, if your tenants are not in a well-off area of South Florida, you should think twice about collecting the final month’s rent. If your market can’t pay for it upfront, your property will be on the market for an extended period.
You should also consult your property management firm if your competitors are collecting the final month’s rent. If they aren’t, you should not collect it as you will have a harder time filling your vacancy.
Rent Increase Issues
If a tenant renews their lease agreement, the current final month’s rent that you collected should be applied to the “new” final month. This means that if you raise the rent yearly, the final month’s rent you collected won’t be sufficient to pay the new rent amount.
In this case, you can charge your renter the difference of the last month’s rent at the time of the rent increase. Unfortunately, this can cause a strain on your relationship. However, if you don’t collect the difference to meet the new rental rate, either, you’ll end up losing money yearly.
Let’s say your first rental rate was $1,000. In year two, you raised it to $1,200 but didn’t collect the difference from your tenant. You’d be at a loss of $200 – and even more if you continue to rent in the succeeding years (assuming that your tenant always renews their lease agreement).
Whether or not you collect the final month’s rent is ultimately up to you. To make sure you’re making a sound decision, consult the expert property managers at Luxury Property Care. As a South Florida property management firm, we’re here to help you draft a lease agreement that clearly outlines your rent collection procedures. We’ll also ensure that the funds collected are used for what they were intended for.