How to Establish Security Deposit Fees

Security deposits, paid in advance by a tenant, act as financial insurance against the damage of the residence. While they are no guarantee, in most cases, renters want their money returned and will respect your property. Establishing the correct amount depends upon a number of factors.

Instructions

Difficulty: Moderate

1. Charge a high security deposit when your financial risk is high. If you see a lot of turnover in tenants, a higher deposit helps cover damages that occur and provides a strong incentive for the renter. In addition, your financial risk is greater when you allow a pet on the premises or the tenant has poor credit.
2. Consider spreading out part of a high deposit in a rent increase. Many tenants find it easier to pay a little more each month, as opposed to paying a big chunk of money up front. An added benefit to you is the fact that rent, unlike a security deposit, is not refundable.
3. Determine the security deposit based upon the physical characteristics of the property. The general rule is the smaller the property size, the larger the deposit. This applies, especially, to duplexes and single-family homes, where damage to the property is more costly due to the exclusive nature. A tenant can damage more on a house than on a single unit in a multiplex. Assess the security deposit accordingly.
4. Divide the security deposit into a number of payments to encourage tenants to rent the property. While they can balk at an initial $2000 deposit, four payments of $500 provides an easier payment schedule.
5. Check your state’s security deposit rules to determine possible restrictions. Some states have no laws at all, while others limit a deposit to the total of no more than one or two month's rent. Other states allow a set fee, plus an animal deposit. Some even allow a waterbed fee.
6. Require tenant’s insurance in lieu of a security deposit. Insurance companies will issue a policy that pays you directly for damages inflicted by the renter. In addition, the insurance company will check the tenant’s background, giving you extra peace of mind when leasing the property.

Tips & Warnings

• Don’t word the security deposit to read “last month’s rent” unless you plan on using it for that purpose. Legally, the tenant can stay in the unit the last month, with no additional rent payment if you word it that way on the contract.