How Much Should I Charge for a Security Deposit?

There's a lot to collect from a new tenant as you move them in. Not only is there a ton of paperwork, but there's the initial rent payment, extra fees such as pet deposits and, of course, the all-important security deposit.

While your state may have specific rules on how much you can collect for a security deposit, whether you max out your request is up to you. In order to make the best call, you've got to answer the question, “How much is a security deposit worth to me?" and go from there.

What is a security deposit?

Security deposits are a set amount of money tenants pay to cover any damages or unpaid rent. It's your safety net should you end up with a less-than-ideal tenant who doesn't treat the property right or skips out before the leasing period is over.

They're also something a good tenant gets back once they move out. Should they leave the home in good condition and pay their rent on time, you'll have no need for this financial security blanket anymore and can return funds to your tenant.

Over the course of a lease, all security deposits sit in their own interest-bearing account. Some states require that you share a deposit receipt with your tenants but not all. This money cannot get spent. Also, landlords must give documentation of issues that go beyond the typical wear and tear on a property if they withhold any security deposit funds.

At the end of a lease, if you notice significant damage, you can then use the security deposit to cover it. You typically must supply the tenant with a receipt of the work done, and you cannot keep more of the deposit than you need. For example, if all you're doing is replacing lost keys, you'll need to give the majority of the security deposit money back.

How much is a security deposit?

Although state laws will dictate the maximum amount you can request when collecting a security deposit, it's a common practice to set it at one month's rent. This means differently sized rentals homes, in different locations, will have different security deposits. Keeping it consistent, though, at a single month, or even a month-and-a-half, makes it fair across all your properties.

Additionally, you run a lower risk of prospective tenants seeing the security deposit as too high by keeping things within this range. Don't forget to look up your state's maximum though to make sure you don't ask for more than what's legally allowed.

What else influences the total

Other factors that can impact security deposit totals include the neighborhood and the financial state of the tenant. If the area where your property is has other properties charging three month's rent for their security deposit, there's no reason you can't either.

At the same time, if you encounter a tenant with strong employment history and well-established rental records, you may feel comfortable charging them a lower security deposit.

Although these additional factors may alter the total in some cases, having a standard formula will make it easy to decide how much a security deposit is for most of your tenants.

Returning a security deposit to tenants

The amount of time you have to return an unused security deposit after the tenant vacates your property varies by state. However, the maximum time frame is 60 days. Make sure you know your own state's deadline and adhere to it.

Once you've established how much of the security deposit to return, issue a check to the tenant. You may also have to pay the interest earned on the security deposit back to the tenant as well.

You should have gotten a forwarding address from your tenant, but if not email them to ask where to send the check. When you mail it, include a letter within that either states you're returning the full amount, with interest, or has an itemized list of the deductions you made. Even if you end up spending all the security deposit, you'll still need to send a letter listing the expenses it covered.

Keeping a security deposit

Should larger issues, or a lot of little ones, occur, you may end up having to keep the entire security deposit to cover your costs. This is fine as long as you document all your expenses and inform the tenant. Typical reasons to use a security deposit include:

• Removal of left-behind items
• Unpaid rent
• Broken lease penalties
• Oversized holes in walls
• Paint removal if tenant changed the wall color
• Excessive filth, mildew or mold
• Animal stains
• Replacing or fixing anything that's broken or severely damaged

As you make these repairs or get these types of services done, store all work receipts in a single spot. You may have to present copies to your tenant. It's also a good idea to hold onto them should a tenant challenge any deductions from their security deposit.

Alternatives to charging a security deposit

If dealing with checks and managing different accounts to keep track of security deposits isn't something you're interested in doing, there are alternatives. These options also may help tenants find it easier to pay a security deposit, giving you more eligible renters for your properties.

Alternative security deposits come in different forms. Some operate more like an insurance policy while others function as a bond or credit. Others allow renters to pay their security deposit in installments through a third party. This gives you access to the full amount from the start but puts less pressure on the tenant to bring upfront cash.

Additional security deposit options

If you're struggling to find tenants as a result of the security deposit, you may want to consider allowing tenants to use one of these companies instead:

• Rhino is free for landlords and gives you the ability to pick the level of protection you want. They then handle all claims in-house for a quick reimbursement turnaround.
• Jetty works much the same way with coverage against damages and unpaid rent by giving tenants the option to pay upfront or on a monthly basis.
• LeaseLock is similar to an insurance policy for your properties. For tenants, a small monthly fee takes the place of a security deposit. A $5,000 insurance certificate then replaces the deposit you'd normally get.
• SureDeposit replaces the traditional security deposit with a surety bond. This maintains the tenant's responsibility to pay for damages, etc. but adds an extra layer of protection should the tenant fail to cover costs.
• Obligo makes it possible for landlords to collect funds as needed by acting as the intermediary for tenants. You can charge a tenant up to what the security deposit amount would be and get a direct transfer of the payment.

Each alternative does things a little differently, but they all provide relief to your tenant when it comes to having the cash for a security deposit ready when signing the lease. This can then widen your pool of prospects each time you list a property.

Doing security deposits right

No matter what method you use to keep yourself protected from tenant-inflicted property damage and unpaid rent, having an option in place is essential. Many tenants will still expect to pay a traditional security deposit, which is why it's important to price them right.

It's also a good idea to determine how much is a typical security deposit in your area before renting your property. Find out if prospective tenants would be happier with a security deposit alternative. It's an ever-evolving process, but keeping yourself covered should always be a high priority.