The dreaded question that looms: how much should I charge for a security deposit? Nobody likes to think about it, and even fewer people like dealing with the hassles that come of this issue.
Most property management firms know that requiring a refundable security deposit is important. On occasion, you’ll see someone in the old Craigslist ads that just doesn’t get it: and that’s a big problem.
The security deposit is usually kept on file to protect property owners and management against a legal term known as “non-performance”. This isn’t just skipping out on the lease, but it’s also for damages or even expenses that happen when a tenant behaves badly.
Legal Issues With Security Deposits
The first step is understanding that with security deposits on residential properties: there are laws in place to prevent discriminatory or even unfair treatment. You:
- Cannot charge a family with children more than you would someone who does not have them.
- Cannot charge an “excessive” amount.
What is an excessive amount? Well, your state probably has a standard to make it simple for you. For example, in California, a property manager may collect one month’s advanced rent. Then, the deposit is only allowed to be the equivalent of two months’ rent for an unfurnished property and three if it is furnished. The laws are different from state to state. You can find your state’s laws at Nolo’s Security Deposit Limits From State To State chart.
I have seen quite a few ads where the owner has listed that first and last months’ rent are required, and then, a security deposit. Though this is allowed, it’s not always the most marketable way to go about things.
I have also seen it where property owners will list a property with a security deposit that is half the rent. When you compare the two, that looks like the better way to go, but, the kicker is: it’s a good idea if you’ve got a big apartment complex. It’s not so great for houses or smaller complexes and duplexes.
This is because with a bigger rent roll, you don’t have to worry about the hit you’re going to take from one or two, whereas, if you don’t have quite as many properties- you might lose a lot more money in the time that rental has to be off market for repairs and otherwise than they would.
If you’ve only got one or two properties, or units, it’s just a bit more intelligent to keep more security deposit funds, as it is consistent with the applicable laws in your state. It acts as a decent pre-screener and it keeps you protected. The rule of thumb here is generally to keep the deposit the same amount as the rent rate per month.
How do you determine what your security deposit will be on your units?