Security Deposit vs Last Month's Rent?

[Justin Silverio]

I'm new to landlording so please bear with me.

I'm closing on a condo in the next month and I'm not sure if I should collect last month's payment or a security deposit. The condo is in a low income area so I don't think I could get away with collecting both. I'm going to see if I can find a tenant for a 1 year lease, but if not, I'll have to go with a month to month lease.

Should I collect a security deposit or last month's rent? Also, are there any differences from a legal perspective?

I assume with a month to month, I would just collect a security deposit?

[Dawn Anastasi]

There is a difference. A security deposit is not "income", it's treated as a deposit in case the person damages the unit. You take money for anything above normal wear and tear. Security deposits you need to check with your state if it needs to be in an non-interest bearing account. Also you need to check with your state on the amount -- most times people collect the security deposit as the same amount as the rent, but you can collect any amount up to your state's limit.

Regarding the "last month's rent", if you collect it now and then the tenant stays a while and during that time, you raise the normal rent, if you don't collect extra for the pre-paid rent, many states won't allow you to collect it.

I would recommend collecting first month's rent and a security deposit, and leaving the last month's rent out of it. Include a provision in your lease that the tenant must give you 30 days written notice to leave, and that they may not use the security deposit as the last month's rent.