How to Set an Optimal Security Deposit for Your Rental Property
It’s not breaking news that too much stress can wear us down. However, life is full of surprises – both pleasant and not. And while we can’t predict what the future holds, taking preventive measures to feel more secure is sure within our scope of abilities.
If you make a living as a landlord, you should be well aware of all steps and measures you can take to avoid losing money and healthy nerves. Among them are such measures as tenant screening, move-in inspection, and many others, but it’s security deposit that always tops the list. And I’m here to explain you why.
What is security deposit?
Well, the term is pretty self-explanatory. Exactly as it sounds, a security deposit is a sum of money you can keep and use to cover all possible repairs and cleaning that might be necessary once your tenants move out.
Typically, security deposit is paid at the moment of signing a rental lease and returned within an agreed time frame when tenants leave your rental property. But depending on what state you are in, the minimum/maximum amount for security deposit and the deadline for its return may vary. More on that in the next sections.
Why is security deposit necessary?
There are three reasons why security deposit is considered a common practice all around the globe:
- It protects landlords against financial losses associated with property damage.
- It helps landlords solve the problem with delinquent tenants who fail to pay monthly rent or utility bills.
- It motivates tenants to be more careful and tidy, as they don’t want their money to be deducted.
How much should you charge?
That’s a tricky part, but I’m glad you asked. Generally speaking, success is all about finding a happy middle between charging enough to cover all potential damages and not requiring too much because it might frighten prospects off.
What’s more, the amount you’re allowed to charge is legally regulated. While some states like Florida, Taxes, and Illinois don’t set any limits, others define a strict maximum you can charge. For instance, your maximum limit in California would equal two months’ rent, and you will have to return it within 21 days. New York, in its turn, sets no limit at all and only indicates that the sum and time of return should stay reasonable.
Check out your local state regulations to find out what maximum you’re allowed to charge and how strict the deadlines for deposit return are. And since it’s better to be safe than sorry, make sure to double-check related laws on state, county, and city level.
What factors affect how much to charge?
If your property is located in a state with strict regulations, you can breathe a sigh of relief since the legwork is done for you. All that’s left is to budget around statutory rates.
But in case it is not regulated, you need to know what factors to consider when setting an optimal price. Below is the list of most valuable factors you should take into account:
Monthly Rental Price
If you’ve already managed to set a fair rental price, it’s actually half the battle. Oftentimes, a monthly rental price is the only factor landlords take into account when establishing their security deposit – and there are solid reasons for that. Since monthly rental price is calculated from the market value of property, its furnishings, amenities, and other factors, it’s completely reasonable to use for the task. Standard practice calls for keeping security between one or two monthly payments.
Property’s Market Value
Another obvious factor. The higher your property’s market value, the more reasons to set a larger deposit you have. If you have plenty of expensive appliances and furniture, the more it will cost you to repair them in a case of damage. And it completely justifies your idea to ask for a higher security deposit.
In nearly all cases, landlords ask a larger security deposit for furnished apartments. And, if you think of it, the trend is completely justified. If your rental property is furnished, it’s not only walls you should be worried about. What’s more, furniture tends to show wear and tear significantly faster than, say, windows or stairs. Don’t hesitate to require a larger deposit if your apartment is filled with all necessary stuff.
Increased Damage Risks
The best example I can think of is charging a higher security deposit for tenants with pets. Since four-legged friends are not famous for being tidy and careful, it’s a good idea to protect yourself from pet-related damages that are likely to occur.
For instance, if your future tenants are moving in with pets, you can either adjust the price of security deposit (read: make it higher) or keep your security deposit the same and charge a pet deposit instead.
Should you be flexible or not?
As experience confirms, good agreement on both sides is what matters most. That’s why there should always be some wiggle room. There are situations when it would be a good decision to accept a smaller security deposit. And there are also situations when just the opposite is necessary.
Flexibility is key, that’s why we not only allow but even encourage custom offers. To see the feature of custom offers in action, you only need to register as a landlord, add your property listing, and indicate your expectations of monthly price and deposit. The rest is up to your prospective tenants.
And what’s the bottom line?
Some tenants find it difficult to deliver on reasonable expectations of others. And even the most comprehensive tenant screening cannot reveal all the bitter truth about such people. So yes, being a landlord means exposing yourself to risks. But the good news is that you can leverage these risks, and security deposit is up for the task. Find out your local policies regarding security deposit, determine its optimal size based on all factors described in this post, and sigh with relief. Your rental property is now secure.
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