Security deposits are a necessity in the landlording business. They are used to incentivize tenants to give our property back in the same manner it was provided to them. Over the years we have learned some things to keep security deposits feasible and practical. Here is some Advice From Experience on security deposits.
1. Know Your Local Laws – Local laws may dictate how much you can charge for security deposits. Many states have no maximum. But others may only allow a month or two of rent. Some local laws will determine how security deposits are held and others may even require that interest be paid. A decent guide to state security deposit laws can be found here.
2. The Market Will Determine Rates – If there is no law in your area setting security deposit maximums, then your competition is going to do it for you. The trick is to know exactly who you are competing with. Are you high end or lower end? Do you offer a lot of amenities or not? Keeping tabs on what your competition is offering is the a key part of this business.
3. You Can Charge What You Want, But… – If you charge too much, you will price yourself out of the market and lose potentially great tenants to your competition. On the other hand, if you charge too little, you may not create enough incentive for a tenant to keep things neat, clean and in working order. There is a balance that needs to be found. What that balance is for you and your particular situation will take a bit of research and most likely some trial and error as well.
4. Be Careful Charging Differing Amounts – Avoiding illegal discrimination also has to be one of your top priorities when you are a landlord, and charging differing amounts for security deposits can look awfully suspicious to some. Yes, you can do it sometimes and sometimes you should. But perhaps keep the differences limited to different properties. Or perhaps use different amounts if the tenant has a pet. There are of course other situations where you might want to cover yourself with additional security deposit amounts. Just tread carefully.
5. Do Not Charge The Same Amount As Your Rent – Doing so may equate the rent with the security deposit in the tenant’s mind. You as the landlord want those two items to be thought of as separate and distinct. The last thing you need is a tenant not paying that last month of rent before they move out thinking the security deposit will cover it. You do not want to have to chase a former tenant down to recover things that should have been covered by the security deposit.
Security deposits are often overlooked as a very routine part of the business. They should however be carefully considered. The incentives and cushions security deposits provide are an important part of being a successful landlord.
Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors. Contact Kevin here.
