How Much Should a Security Deposit Be For a Rental Property?
As a property owner, it is necessary for you to protect your assets from the potential damages that a tenant may leave. The best way to do this is to require a security deposit at the start of a new lease. If a tenant properly cleans a home when they move out of it and don't create any damage, then they can have their full deposit back. If they cause damages or don't clean the home, however, you'll have funds that can be used to restore the property. How much should a security deposit be for a rental property? There are a number of factors that need to be weighed in order to find the right amount.
1. You May be Limited by Law to How Much You Can Charge
Many states in the US have laws on the books that limit how much a landlord can charge as a security deposit. Most of these laws require the deposit to be a month or two month's rent maximum. This means that if you are charging $800 in rent per month for a two-bedroom single family home, you might only be able to request an $800 security deposit.
2. You Have Expensive Items Within the Home
It costs more to replace a solid copper doorknob than it does an aluminum doorknob. Crown molding is more expensive to replace than basic trim that can be found at the local hardware store. More expensive items stand up to wear and tear better, so that can keep deposit rates down, but if they get damaged, an entire security deposit could go to their replacement and you'd have to file a collection notice to get the remainder that is due to you. Finding a balance between risk and cost usually puts a property owner in a comfortable position.
3. Higher Security Deposits Naturally Eliminate Certain Tenant Demographics
There are a lot of households that might want to live on your property, but they would have to dramatically stretch their finances in order to make that happen. By having a higher security deposit, at least the equivalent of one month's rent, you'll be able to eliminate certain demographics that aren't as financially responsible to pay their rent on time. By requiring first and last month's rent at the start of a new lease as well, you'll legally create a situation where households that are reasonably fit financially will be applying.
4. Think About the Worst Case Scenario
If you have served a notice to pay or quit, then if it is not followed, you'll be able to use the security deposit as a means of being able to recover lost rent and pay for any needed repairs. 98% of tenants are going to pay their rent on time, but as a property owner, you need to plan for that 2%. Charge what you think will cover the worst case scenario as a security deposit up to the maximum allowed and you'll be able to better protect your investment.
5. Don't Treat the Security Deposit as Extra Income
No matter what you decide to charge for a security deposit, the #1 mistake that landlords make is to treat the deposit as income. It is not money you can legally access unless the tenant moves out or violates the lease in some way and you've given prior notice. It's the tenant's money and it must be kept separately from other finances. By knowing how much to charge for a security deposit, you'll be able to protect your investment, repair it if necessary, and get tenants living on your property that you can rely upon. Know your local laws and don't be tempted to charge less than 1 month's rent unless you absolutely must.
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