California Security Deposits: Are First and Last Month Allowed?

As I was browsing NextDoor, there was a post for a well-priced vacancy in the area, so of course it piqued my interest. As I was reading the description and comments, the owner was asking for first and last month rent in lieu of a security deposit. This sparked a lively conversation in the comments and is the foundation for today’s post: Are owners allowed to collect first and last month’s rent?

The key is understanding how the money is categorized: security deposit vs. prepaid rent.

Security Deposit Limits in California

California law regulates how much landlords can collect as a security deposit, and new restrictions are in effect that most landlords need to follow.

General Rule: Security Deposit Limited to One Month’s Rent

Starting July 1, 2024, Assembly Bill 12 (AB 12) caps security deposits at one month’s rent for both furnished and unfurnished residential rental properties. This applies to the majority of landlords in California, significantly reducing the previous limits of two months’ rent for unfurnished units and three months’ rent for furnished units.

Exemption for Small Landlords

Not all landlords are subject to the one-month security deposit limitation. Landlords who qualify as small landlords are exempt and can still collect:

• Two months’ rent as a security deposit for unfurnished and furnishd units.

Who Qualifies as a Small Landlord?

To qualify for this exemption, the landlord must meet all of the following criteria:

1. Own no more than two residential rental properties (e.g., single-family homes or condos).
2. The properties are owned by a natural person and not by a business entity such as a corporation, LLC, or REIT.
3. The landlord does not own more than four total rental units across these two properties.

These exemptions are designed to provide flexibility for small-scale, individual landlords who manage their own properties.

What Can a Property Provider Collect at Move-In?

At the start of a tenancy, landlords in California may collect the following:

1) First Month’s Rent

Collecting the first month’s rent upfront is standard and allowed.

2) Prepaid Rent (Sometimes Confused as “Last Month’s Rent”)

While landlords may request prepaid rent for future rental periods, this is not the same as collecting “last month’s rent.” Any agreement for prepaid rent should be clearly defined in the lease agreement. Generally, this is offered by a tenant and not a requirement of the property provider.

3) Utility Fees, Pet Fees, and Other Associated Fees

A property provider can collect any agreed-upon fees prior to move-in for the initial month such as parking fees, utility fees, pet fees, or other fees related to the specific tenancy.

Considerations for Property Providers

• Transparency: Always disclose all upfront costs in the advertising and lease agreement.
• Documentation: Provide detailed receipts for all funds collected. Clearly categorize charges in the lease agreement (e.g., first month’s rent, prepaid rent, or security deposit).
• Compliance: Stay updated on local rent control and tenant protection ordinances, as they may impose additional restrictions.

Key Distinctions Between Security Deposits and Prepaid Rent

Landlords often confuse security deposits with prepaid rent. Here’s the difference:

• Security Deposit: Covers damages, unpaid rent, or lease violations. Refundable unless applied to costs permitted under the lease agreement.
• Prepaid Rent: Applied to future rental periods as agreed in the lease. Non-refundable unless specified otherwise.

Final Thoughts

Back to my neighbor on NextDoor, although she states she falls under the small landlord exemption and therefore she believes she can collect two months of deposit, she may be misclassifying the funds. In her case, it does seem that she would be allowed to collect upfront funds equal to two months’ rent due to her small landlord status. How she classifies these funds should be clearly stated in the lease agreement.

Need help navigating California’s changing rental laws?

At EJ Properties, we specialize in helping property providers comply with legal requirements, optimize their rental practices, and protect their investments. Contact us today for personalized guidance and expert property management solutions!

Related Reading

• California Security Deposit Limits: Understanding AB 12 – A focused breakdown of deposit rules and compliance considerations.
• Leasing & Screening for Investment Rentals – Reduce risk with clear policies, screening, and consistent processes.