It is a crucial business practice for a landlord to collect a security deposit initially from any renter. The deposit is there to provide funds for default on the lease or damages to the rental. How the funds may be used is wide-ranging. Most states allow it to be applied to damages above and beyond normal wear and tear and unpaid rent or charges. It is certainly best that these funds be collected before the keys are handed over.
Security Deposit Funds
It is wise to collect the security deposit as a guaranteed source of funds such as a money order or cashiers check. Licensed property managers must keep these funds separated from all operating funds. Most states require a trust account setup. The funds are on hold for the performance of the contract.
How Much Security Deposit Can Be Required?
The amount of security deposit may be regulated by your state. Be very careful when adjusting the security deposit for additional risk factors.
The most common one is pets. There are several good practices for handling pets, but if you want to charge an increased deposit for pets, be sure and actually separate it out and call it a pet deposit. Pets are not covered under Fair Housing (except for service animals and in that case do not charge any type of pet deposit)!
Do not use this process for things like number of children in a home. I would be very concerned about a Fair Housing violation using such a tactic. The solution is to adjust the rent for the risk, and then charge the deposit in correlation to the rent. If the risk demands it, charge 1.5-2 times the rent.
How The Security Deposit Shuts Out Some Applicants
In our rush to be logical in figuring out the security deposit to charge, some owners chase away the tenant. Tenants usually do not have the cash reserves available to fund large deposits. If the tenant has enough cash for a really large deposit, they would likely be trying to buy and not rent a home.
A Good Starting Point – Hold One Month Rent As The Security Deposit
A logical place to start is collecting the deposit in the amount of one month rent. It is almost like requesting the tenant have a reserve to make one month payment and you, the landlord, will hold it. I would discourage sharing this reasoning with the tenant. The tenant might use this reasoning at the end of the lease. They will consider not making the last month rent payment since a security deposit is on hold. That is wrong and not what the lease should say or allow. Spell that out to the tenant when collecting the security deposit.
One month rent as an amount for the security deposit will weed out financially challenged tenants. Think twice before agreeing to let them pay half the first month and half the second. Take their inability to have those funds as a bad sign and move on. If a tenant fails to pay timely, get the eviction moving so the funds can be put to work quickly to cover lost rent and repairs to the home.
Unfortunately, no amount of security deposit will be enough for you if the good tenant goes bad. The hope is that it is enough to encourage the good tenant to stay good.