Key Money

Publication Date :

12 May, 2025

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Table of Contents

Key Money Meaning

Key money refers to an informal fee or charge paid by a tenant to a property owner or landlord. This payment is made to renew, extend, or secure a new or existing residential rental property. It acts like an extra reward or bribes paid to the landlord or apartment superintendent to expedite the lease agreement.

In US law, it is considered an illegal bribe, with its enforceability and legality varying according to local regulations and laws of various states. It is mostly used in real estate in the US as a legally demanded deposit per state law, along with proper documentation.

Key Takeaways

Key money gets paid by tenants to landlords or property owners to secure, renew, or extend residential rental properties. It acts as an additional reward or bribe informally.
Factors affecting key money include property value, demand, amenities, competitive market, legality, tenant requirements, and landlord's perspective.
Other factors include demographics, location, property condition, high-demand properties, newer, large-sized properties, and legal conditions.
It gives immediate financial benefits to the landlord. However, it adds a financial burden to the tenant.
It helps compensate the landlord for expenses like changing locks and key duplication and securing tenancy. Conversely, a security deposit protects the landlord financially against untoward damages due to tenants.

Key Money Explained

Key money is stated as an advance payment made to the landlord by the prospective tenant to finalize the lease rental property in addition to the first month's rent and security deposit. It helps the landlord choose a serious contender as a tenant over non-serious applicants for renting their property where rental markets are competitive.

It may be taken as a bribe or an under-the-table exchange of money outside the purview of regulatory laws in exchange for the leasing right to the tenant by the landlords. Moreover, it helps landlords cover costs associated with property renting, like agent fees, advertising costs, and vacant periods during the transition between tenants. The process starts when a tenant approaches a landlord to seek lease rights over their property. However, if the competition for the property is too high, the tenant offers key money to secure the lease in their favor.

Although it seems beneficial, it creates an entry barrier to new market entrants like entrepreneurs or small businesses to establish them, as the key money charged by landlords tends to be quite high. As a result, it may also lead to an affordability crisis in real estate markets in high-demand regions.

It implies a level of tenants' commitment to seeking rental properties. It makes the properties more lucrative to tenants in the market. However, it impacts the financial world due to its unregulated under-the-table cash going into the economy or black money.

Factors

There can be numerous factors affecting key money, including:

Properties in areas like the city center, good public transport, good environment, and schools influence the value set by the landlord.
A high-demand property tends to have higher money as advance for payment to the landlord.
Newer, larger properties with better amenities demand higher key money upfront from tenants.
A competitive market motivates landlords to maximize their gains by asking for higher money as an advance.
In places where it is illegal or legal, it affects the value and demand of such money by landlords or even by key money hotels taking guests for a long duration.
Tenant's requirements, financial status, and benefits of the property for their work and residency decide the payment of key money to the landlord.
The landlord's perspective, financial condition, mindset, risk-taking aptitude, demographics, location, and property condition impact the asking of the amount of money as cash upfront from the tenant.

Examples

Let us use a few examples to understand the topic.

Example #1

An expatriate, Johnny Joe, left the US to learn traditional martial arts in Japan. He seeks to live in an apartment in Japan. Here, traditionally, one has to pay key money to their landlords to prioritize and secure rented housing in the host country. Hence, sometimes, Japan's key money is also known as Reikin.

Reikin means a non-refundable payment to the landlord before securing a rented apartment. It can amount to a few months' rent taken together paid to the landlord by the prospective tenant. Furthermore, it serves as a way to express gratitude and show a goodwill gesture to the landlord.

Example #2

A news article published online on Dec 2, 2022, discusses the legality of key money in California state of the United States. California has made it illegal for landlords to ask for such an amount from their tenants to secure leasing, similar to federal tax laws. However, under certain conditions, they can only ask for key money in real estate from commercial tenants. Moreover, the advance cash payment is taken from such tenants:

has to be recorded in the rental agreement
must not be made a prerequisite before taking an application for rent
must not be deemed mandatory for continuing or initiating rent agreement
include reasonable vetting fees of the attorney

Nevertheless, to be on the safe side, landlords must get help from expert legal professionals to prevent any serious litigation.

Pros And Cons

It has pros and cons for both tenants and landlords, as listed in the table below:

Pros	Cons
Gives immediate financial benefits to the landlord.	Adds financial burden to tenant
Gives a competitive advantage to tenants.	Limits the option of housing to everyone.
Increases getting of rental properties for tenants	Landlords may demand exorbitant amounts from tenants, adding to the lack of transparency
Helps tenants to leverage negotiation.	It may curb tenant rights on behalf of the landlord.
Increases warmth and cooperation between landlord and tenant	It adds limited recourse to risk for tenants in case the landlord refuses to refund them without allotting the lease to them.
Provides financial advantage to landlords.	Increases money-based inequality and discrimination amongst tenants.
It helps landlords filter out only serious tenants for their rental apartments.	Curbs innovation and market competition in real estate.

Key Money Vs. Security Deposit

Both are used to facilitate the work of tenants treated to leased property but have certain differences, as shown below:

Key Money	Security Deposit
Helps compensate landlords concerning expenses like changing locks and key duplication and secure tenancy.	Protects landlord financially against untoward damages due to tenants.
Usually remains verbal only for a short term.	Mostly done in writing in legal format for the long term.
The tenant pays it to the landlord before moving into the property.	Conventionally paid before shifting, at the time of the agreement, or along with the first month's advance payment to the landlord by the tenant.
Non-documented and non-refundable.	Refundable to tenant only if there are no damages or dues to be paid by tenant.
It may vary in amount depending on the situation and the parties involved.	Remains fixed as per the rental agreement.
Accepted directly by the landlord.	It may or may not be paid directly to the landlord.