Security Deposit vs Advance Rent: What Is the Difference?

Advance rent is rent paid ahead of time for one particular month, usually the first. A security deposit is money you hold as security, returned to the tenant at the end of the upa once the legitimate charges have been taken out. They do different jobs, so they should sit separately in the kontrata and in your records.

"One month advance, two months deposit" is what you hear everywhere in the Philippines. But plenty of landlords and tenants are fuzzy on what actually separates the two. Let us clear it up.

What is the difference between deposit and advance?

• Advance rent: money already paid for a month of upa. Once it is used, it is done. It does not come back, because the tenant had the unit for that month.
• Security deposit: this is not rent. It is a fund set aside for damage, unpaid rent or bills, and other liabilities of the tenant. It goes back at the end of the kontrata.

An easy way to remember it: the advance is "already paid", the deposit is "only held".

Which is why the deposit is not your income. It is a liability to the tenant until it is returned or properly deducted.

How much deposit and advance may you ask for?

Broadly, landlord and tenant agree on this in the kontrata. But if the unit is residential and falls within rent control, the law limits the number of months of deposit and advance you may ask for. Under the Rent Control Act, one month of advance and two months of deposit is the maximum for covered units.

The coverage of rent control, meaning the rent level that falls within it, changes with government resolutions, so always check the latest DHSUD issuance. Read our guide to rent control in the Philippines.

For commercial spaces and leases that are not covered there is more room to negotiate, but it should still be clear and reasonable.

Can the deposit be used for the last month?

This is the classic one: in the final month the tenant says, "Just take it out of the deposit." The right answer: it is not automatic. The deposit is not an advance. Use it as the last month's rent and nothing is left for damage or the final bills.

If you do agree, make it clear:

1. Put in writing, even in a message, that you agreed and how much is being deducted
2. Inspect the unit before you agree
3. Make sure enough is left over for the final electricity and water
4. Next time, write into the kontrata that the deposit may not be used as rent without written permission

How is the deposit returned properly?

A tenant's trust usually breaks at the return of the deposit. To keep the peace:

• Inspect with the tenant on move-out day, with photos
• Compare against the move-in photos and the inventory
• Deduct only the legitimate charges: unpaid rent, unpaid bills, and damage beyond normal ageing
• Draw up an itemised list of every deduction, with an amount and a receipt or quotation
• Return the balance within the days stated in the kontrata

Normal ageing, such as faded paint or light scuffing on the floor from daily use, is normally not deducted. There is more detail in our move-out checklist.

What if the final electricity and water bills have not arrived?

The last Meralco or water bill usually turns up a few weeks after the tenant has gone. This is where a deposit holdback comes in: you hold a reasonable part of the deposit until the final bill arrives, then return whatever is left over.

For it to work properly:

• The kontrata says you may hold back for the final bills
• There is an estimated amount, based on previous bills
• There is a set day by which the remainder goes back
• You show the tenant the actual bill when it arrives

What records should you keep?

Because the deposit is a liability, your records should be clear from beginning to end.

• The receipt for the deposit and advance at move-in
• The kontrata, with the amount and the conditions written in
• Move-in and move-out photos
• The itemised list of deductions and proof of the return, a bank transfer record or a signed acknowledgment

For units covered by rent control, the law also says the deposit should be placed in a bank and the interest goes to the tenant. Ask how that applies to you.

How MagpaUpa helps

In MagpaUpa the deposit and advance are tracked as a liability rather than as income, so you always know how much you are holding for each tenant. In the lease terms you can set the deposit return days and the deposit holdback for the final utility bills. At move-out, the move-out settlement produces an itemised computation of the deductions and of what goes back. Try MagpaUpa.