Becoming a Landlord – Part I: Tenant Deposits

for_rent_signBack in February, I posted on issues related to converting your home into rental property (“Converting to investment propertyFebruary 2, 2012). The current post is a continuation of the subject matter, but focuses on what I believe are the key things you need to know if you decide to get into the landlord business. The Massachusetts landlord/tenant laws are considered some of the toughest, most pro-tenant in the country. Many landlords don’t understand the requirements surrounding tenant deposits. If you are going to be a landlord, you need to know how this works.

  • What can you collect in advance?

Mass. General Laws c.186 s. 15(1)(b) specifically states that “no lessor may require[emphasis added] a tenant or prospective tenant to pay any amount in excess of the following:

(i) rent for the first full month of occupancy; and,

(ii) rent for the last full month of occupancy calculated at the same rate as the first month; and,

(iii) a security deposit equal to the first month’s rent ……

(iv) the purchase and installation cost for a key and lock…”

Notice that the exact language of the law is “no lessor may require[emphasis added]…”  Landlords who charge extra fees such as “cleaning fees,” or “pet fees,” or even “credit check” fees are in blatant violation of the law. In those cases, a tenant could later deduct those amounts from her rent, and the landlord would likely have little recourse. The trickier case is where the landlord  and the tenant work out an arrangement where the tenant pays a large portion of the entire lease, such as 6 months or a year, up front. There are situations where this is clearly desirable for both parties. For example, a tenant with marginal credit  might make an offer of six months rent up front to make the deal work. It may not, however, be a legal arrangement. If you are considering making a rental deal and taking more than first, last and security deposit, you should consult an attorney to consider the risks and benefits.

  • What to do with the security deposit and last month’s rent?

The specific requirements set out in the Massachusetts General Laws are nothing short of onerous. See also: Massachusetts Security Deposit: Last-month’s Rent Traps for the Unwary Landlord. For example, the security deposit has to be put into an account that is entirely separate from the landlord’s own funds.  The landlord must also pay the tenants the interest every year and it must be the “actual” interest or the “statutory” amount.  The logistical issues related to setting up an escrow bank account in someone else’s name is not that difficult for one single tenant, but gets much trickier for a set of tenants sharing an apartment. If you want to withhold money from a security deposit at the end of the lease, you will also have to have handled the required “condition statement” properly. Then you can only withhold money for specific repairs where you can substantiate the actual cost of repair. Last month’s rent is easier to handle as it does not need to be put in a separate escrow account. However, the landlord is still subject to the interest requirements. Very few landlords handle all of these requirements absolutely correctly, and are at some risk in the event of a lawsuit. With experience, and often trial and error, you just have to decide what works, what doesn’t, and what risks you are willing to take.