Anyone who has ever had the pleasure of renting a house or apartment is familiar with their landlord collecting a security deposit and the first month's rent when they sign the rental agreement. Just as the name suggests, a security deposit is a deposit made by the tenant in the event the tenant were to destroy or damage the property while renting it.  In some situations, the landlord may take the deposit and use it as the last month's rent as well. The question is: how does last month's rent differ from a security deposit and what can the landlord do with that money?

Security Deposit or Last Month's Rent?

If the lease agreement states the security deposit is last month's rent, the tenant does not have to pay last month's rent. It is important to verify this information by getting it in writing as using the security deposit to pay last month's rent depletes the landlord's ability to use the deposit to pay to repair any damages the tenant made to the rental property.

Here is an example of what happens if a tenant's landlord takes a security deposit as last month's rent:

A tenant has just signed a lease. He or she pays the first month's rent and the deposit. In the rental agreement, the deposit is referred to as "last month's rent". This limits what the landlord is allowed to do with the money as it requires the landlord to use it for the last month's rent first. If the security deposit is simply referred to as a security deposit the landlord has flexibility regarding whether he or she can use the money to repair damages or last month's rent.

State Laws May Differ

Unfortunately, most states have slightly different laws regarding how security deposits and last month's rent are handled. Some states may require landlords to put the money in an escrow account. It is vital to check the local laws regarding security deposits and last month's rent before signing a lease agreement and moving into your new home.

From both a landlord and tenant's point of view, it is safer and easier to just refer to a security deposit as a security deposit. This gives the landlord flexibility to use the money for damages and repairs or last month's rent; and it protects the tenant from being sued for money unless he or she damaged the property in ways that cost more money than the total amount of the security deposit. Talk to a tenant services company, like Two Rivers Investment, for more help.