There’s one final step before you hand the keys to a new tenant—receiving the security deposit along with the first month’s rent.
Now, let’s focus on security deposits.
In this post, we’ll discuss how to determine the right amount of security deposit to collect from your tenants.
As the property owner, determining a fair security deposit will be up to you. And, you need to decide on the total amount before renting the property since it should be on the tenant application and on your lease or rental agreement.
Tenant security deposits are tricky business. You can’t just pull a number out of thin air.
Charge a deposit that’s too low and you risk losing money paying for damages to the unit out of your own pocket. Damages that could have been covered by a higher deposit.
But charging a security deposit that’s too high may drive tenants away. Considering that 35% of renters struggle with upfront rental costs (which includes the deposit money), your occupancy rate may suffer if people can’t afford to move into your rental unit.
And, there’s no standard formula for tenant security deposits.
Applicable security deposit laws also differ from one state to another which makes it more complicated to determine the right amount.
But first, what is a security deposit?
Security deposit refers to the fixed amount a tenant must pay a landlord before moving in. Because of this, some people call it key money.
The landlord can use this specified amount to pay for damage costs. If the tenant leaves without paying the bills, the security deposit would also cover that debt.
Although security deposit rules in each state vary, these deposits are all refundable. Most states also require landlords to return the security deposit to tenants within the prescribed time and with accrued interest.
Now let’s talk about how to choose the right security deposit amount.
Step 1: Stick to the Standard Security Deposit - One Month’s Rent
How much are landlords collecting as a security deposit?
It depends on several factors like location and the state of the rental unit. So, reasonable amounts vary.
In 2019, 87% of renters paid an average of $600 as a security deposit. On average, landlords require a security deposit equal to one month’s rent.
One month’s rent is also the safest number since some states cap the security deposit at one month’s rent.
But what if you’re renting a furnished property? Or your tenant has a pet?
In any of these cases, you should charge a higher deposit since more items can get damaged. For pets, it’s also better to charge a separate deposit.
Some red flags, including tenants with low credit history, also make it reasonable to charge a higher security deposit. But don’t forget to follow the law in your state—which brings us to the next section.
Step 2: Check to See If Local and State Laws Cap Security Deposit Amounts
Each state has a different law on the required limit for rent security deposits. If you’re doing business in multiple states, things can be confusing.
Nearly half of all states (listed below) allow landlords to choose any security deposit amount they want:
● South Carolina
● West Virginia
Other states cap the security deposit at one month’s rent or two months’ rent. Some states also implement rules depending on the state of the property.
For instance, in California, landlords can charge up to two month’s rent for an unfurnished property and three months’ rent if it’s furnished. But if you’re an active service member, the security deposit for an unfurnished property should not exceed one month’s rent or two month’s rent if it’s unfurnished. If there’s a waterbed, landlords can charge an extra deposit equal to half a month’s rent.
With different rules for each state, it's always best practice to check your state’s regulations. And don’t forget to check local rent control or rent regulations to avoid mistakes with security deposits. Some cities may have a separate rule for security deposit limits.
Warning: Never collect last month’s rent to supplement a low security deposit
Some landlords require tenants to pay the first and last month’s rent along with the security deposit. But if you’re reducing the security deposit because your tenant deposited the last month’s rent, think again.
You can only use the last month’s rent for its intended purpose. And some states specify rules related to last month’s rent in their rental laws.
Even if deductible damages exceed the security deposit, you can’t charge it against last month’s rent.
Aside from the potential legal issue, this condition can drive some renters away.
Step 3: Charge the maximum security deposit for high-risk renters
After getting acquainted with state and local laws, you have a more solid basis for determining the security deposit. And this brings up another way to charge a security deposit—the maximum amount allowed by your state.
For states with a one month security deposit cap, this step will not make much sense. At this point, you should also look into the standard rent contracts in your area and compare them.
By comparing your property with other rentals, you’ll know the trend in your area. But don’t let any standard practice dictate your decision. You can always charge a higher security deposit for high-risk renters like in the cases below:
● The tenant has a temporary or probationary employment status.
● There is a high demand for the property
● Tenant screening came up with some red flags
Just like risky borrowers have higher interest rates when applying for a mortgage, high-risk renters should pay a higher security deposit to rent your unit.
As long as you abide by the rental law and it’s a reasonable amount, you won’t get in trouble for collecting a higher security deposit compared to other landlords.
If you feel the need to explain, remind your tenant that the security deposit is refundable at the end of the lease term.
Step 4: Consider reducing deposits for low-risk renters including seniors
Some landlords offer lower security deposits for low-risk renters—which includes senior renters. And, you can do the same for senior renters.
But there’s a catch.
You may get in trouble with the fair housing law for illegal discrimination.
So, before you decide on a security deposit for any senior renter, check what local rental laws have to say. Some states allow landlords to offer lower security deposit amounts for seniors while others don’t.
Step 5: Require a separate pet deposit
Pets are notorious for causing property damage. Chewed up carpets, torn rugs, and furniture scratches are common issues when the renter has a pet.
And, no matter how lovely these animals are, they also leave a lingering odor.
Since most renters have pets, a “no pet policy” could hurt your occupancy rates. To mitigate potential pet-related damage to the property, you can charge an additional deposit for households with pets.
And here are a few more tips to help you decide on a security deposit for renters with pets.
Bonus Tip #1: Avoid nonrefundable pet deposits
Some states allow landlords to charge a non-refundable pet deposit. This deposit which covers cleaning fees and pet damage could range from $200 to $500.
Other states, like California, consider non-refundable deposits as illegal. So, pet deposits are also refundable.
Whether it’s legal or not, nonrefundable deposits often lead to disputes between landlords and tenants. If possible, make pet deposits refundable too.
Bonus Tip #2: Reward renters with pet damages and liability coverage
Another way to recoup losses from pet damage is through insurance. Require any tenant with pets to get renters insurance which includes coverage for pet damages and liability. This should cost around $15 a month for your tenant.
You can also provide a pet deposit discount for a tenant with renters’ insurance that covers pet damage and liability.
Charge additional rent per pet is also an option. But make sure that you’re not charging over your state’s rental cap.
Bonus Tip #3: Service animals are NOT pets
The Fair Housing Law does not consider service animals as pets. So, the pet deposit policy on your lease agreement will not apply to any service animal.
But if a service animal causes damage to your property, the owner will be liable for such damage. In this case, it’s better to increase the security deposit to cover damage caused by animals in the property.
Step 6: Determine whether a higher rent can compensate for a lower security deposit.
Most renters expect to pay around two month’s rent before moving in to cover the security deposit and the advance payment for the first month.
Tenants may be willing to pay a higher security deposit, but it may cause some strain on their finances.
Remember in the month when tenants move in, they have to pay for expenses like movers, setting up utilities, and new furnishings.
Rather than increasing the security deposit, consider charging a higher monthly rent. This way renters don’t have to cough up a lot of cash during move in.
Extra rent payments go right into your pocket anyway, unlike the security deposit which is refundable at the end of the lease.
Step 7: Provide concessions to deserving tenants.
Like all things in property management—security deposits are always negotiable.
Tenants know security deposits are part of the business and they should be ready to give you the money. But they may still haggle for a more feasible deposit.
And you should consider these requests on a case by case basis. The results of your tenant screening process can help you decide.
If you’re looking for a tenant who not only pays on time but someone who respects your property as well, you should screen potential renters with care.
Based on the results of the screening, determine if you should increase or decrease the security deposit. You can also offer concessions if you can’t change your policy on security deposits.
Now it's your turn!
Navigating security deposits can be tricky. But with this practical seven-step guide, it’s easier to take the guesswork out of determining competitive but practical security deposit requirements.
Security deposit requirements can both attract and repel prospective tenants.
Without a strategy for determining your security deposit, you could drive reliable and trustworthy renters away and hurt your occupancy rate. Or you could end up exposing your business to unnecessary risk.
When you find the sweet spot with security deposits, you can attract the right kind of tenants. Offering a reasonable deal makes it more likely for renters to take extra care of the property.
Now, you have a fair and simple way to determine the security deposit amount to charge to a new tenant.
But before you prepare your listing and rent contract, let us know how you’re planning to determine your security deposit by leaving a comment below.