Steps to Collecting the Security Deposit and First Month’s Rent

Renting to new tenants can be an arduous task – many concerns run through the mind of the landlord. One of the first and most important questions to be asked is, “how and when do I collect the security deposit and the first month’s rent?”

The following article is going to quell your fears by giving you tips to avoid new tenant-related stress.

Why are Security Deposits Collected?

All U.S. states allow for a landlord to collect a security deposit. It’s not compulsory, but there’s no reason to not – it ensures the tenant will comply with the agreed-upon lease.

This deposit will go on to be used as cost cover in the event of the tenant moving out without paying the last rent or damages to the property caused by tenants.

Step 1: Become Familiar with State Law Regarding Rent and Security Deposits.

States have different rules regarding how the rent and security deposits need to be dealt with. Some are more lenient from the tenant’s perspective. Grace periods for rent payments are in place in some states. These are periods in which tenants are given a set amount of days to pay rent before a late fee is charged.

For example, Texas stipulates that the tenant should have a grace period of at least two days before a late fee is charged. California on the other hand does not stipulate a required grace period.

Additionally, some cities prohibit rent increases past a certain point via rent control laws.

Regarding security deposits, again states vary widely on the applicable laws. As a general rule of thumb, most states will stipulate how much you can charge as a security deposit. This ranges from a limit of equal to one month’s rent to having no limit at all. Additionally, many states have laws regarding how the security deposit must be collected and stored and how you must track any deductions from the security deposit. Some, for example, will require you to store it in a separate interest-bearing account and return the tenant’s deposit plus interest.

There is a growing trend from landlords which are now charging a non-refundable move-in fee instead.

Read our Complete State-by-State Guide To Security Deposit Laws

Step 2: Ensure All Agreements Regarding Payments Are in the Lease

Before signing, it’s integral both parties are aware of the obligations of each side. Payments, particularly. Across most state laws, the common details landlords need to include in their lease documents are:

• Address of the rental unit – along with descriptions of the premises
• Landlord or property manager’s contact details
• Payment amount and frequency
• Payment schedule regarding the security deposit, first and last week’s rent
• Lease duration
• Landlord’s and tenant’s responsibilities regarding maintenance

Any event that could arise and lead to legal ramifications should be detailed in the rental agreement also.

It is important to track every tenancy and lease throughout the ownership of your rentals and keep detailed and organized records. Landlord Studio can help you manage your tenants by affording you a simple way to track your tenants, manage communications, store important documents such as your lease documents, and run tenant screening reports. These tenant management features are combined with professional rental property accounting tools so that you can manage everything in one simple place.

Step 3: How To Collect The Security Deposits and First Months Rent

When collecting and tracking payments the simplest and easiest way to do so is through an online payment system. This is much more secure than using paper checks. As such you should find a system, that allows your tenants to make payments online directly into your bank account. This way, once the lease has been signed by both parties your tenants can simply transfer the money for the deposit and the first month’s rent before they move in.

There is also a plethora of benefits that come with using an integrated property management software, including:

• Automatically notify a tenant when the rent is due
• Direct payments from a bank account or credit card
• Calculate prorated rent, late fees, and other irregularities.
• Easily digitize receipts and securely store them with expenses
• Connect multiple bank accounts

Step 4: Separate Payments for Security Deposits and Rent

Avoiding payment confusion is key to having a stress-free life as a landlord. Tenants should pay the security deposit and the first month’s rent separately.

This way, if the rent amount is incorrect, you have a record of how much is yet to be paid and can easily track what you’re owed.

Furthermore, it has become mandatory under most state laws to have security deposits kept separately from the rent. If needed you should help your tenants send over the security deposit via your chosen online payment system and then make sure they set up automatic rent payments to help ensure they are never late with the rent during their tenancy with you.

Step 5: Collect the Security Deposit Only When Lease has been Signed

As a sign of understanding, the collection of the security deposit after the lease has been signed ensures the tenant agrees to the terms of the rental property. The tenant will have ample opportunity to agree to the contract before depositing any money.

Landlords can use software to keep collect the payment online which is a secure ad fast way to accept payments. It also means both parties have evidence and clear record of what has been paid.

Extra Step: Calculate the Prorated Rent Amount

Often, a tenant will be renting a unit for a period that falls under a full month. The tenant is not charged for the entire month but is instead charged pro-rata. This requires a separate calculation for the rent charge.

The formula for calculating the prorated rent amount is:

(Monthly Rent Amount / Number of Days in the Month) * Number of Days Lived in Property by Tenant

For example, Sally’s lease for her apartment starts on January 19^th and ends on December 31^st. The prorated rent would need to be calculated for January 19^th-31^st as it is less than a month. Her rent is $500 a month.

Sally’s Prorated Rent Amount = ($500/31) * (13 days living in property) = $209.69

Luckily, some landlord apps carry a calculator to save you from arduous math puzzles.

Final Words

Landlords can feel the heat when juggling all these responsibilities but finding an integrated application that keeps everything together will save them a lot of stress. With such stringent state laws regarding security deposits and first rent, it’s important to keep the necessary records of tenant/lease documentation.

Lastly, consulting with a licensed CPA or accountant is always a wise decision, especially when this is your first time entering a tenant-lease agreement. A professional who is well-versed in the relevant laws and regulations will give sound advice.

Learn how you can streamline your rental accounting and management with Landlord Studio →