Landlords: Use These Tenant Deposit Policies & Reduce Lost Profit!

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If you are like most landlords, you think that the largest risk to being a landlord is getting your rent.  You know that deposits will protect you, and if you are calculating your numbers correctly, you will make a big profit.

Make no mistake, if you think all you need is a deposit to protect you, you will be headed for disaster.

The number one way to protect your income stream from tenant defaults is to get great tenants to begin with. Good tenants will bring in a solid income of at least 3.5x the rent in income. Preferably much more. With the average family income over $50K annually, just getting an average income will probably be well over 3.5x the rent in income.

Income will tell you the tenant’s ability to pay rent.

The second piece of the puzzle is credit score. With a C-grade credit score north of 620, and the average tenant’s credit score being north of 650, it is easy to weed out lower scoring tenants to reduce risk.

Why take the bottom of the barrel tenants in terms of credit score, and increase your risk? These people may be great people, and some will definitely pay rent, but it is a higher risk potential. Mitigate your risk by selecting a tenant who has proven their ability to stand behind their financial commitments.

Credit score will tell you the tenant’s desire to pay rent.

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The Deposit is for Wear and Tear, Not Rent

Tenant screening will protect you from unpaid rent. The deposit is to cover damages beyond normal wear and tear.

I am not going to go into the difference between “wear and tear” and damages, but if a tenant has lived at a place for 5-7 years, most damages will actually be wear and tear. Ruined carpet after a year is damages. Ruined carpet after 7 years is wear and tear.

Related: The True Cost of a Bad Tenant: Why You CAN’T Afford Not to Screen

How Much to Charge for a Deposit

I charge $1,250 in deposit for a $1,000 to $1,100 apartment. I do not get any additional prepaid rent. Some states I have heard limit you to only a month’s worth of rent for a deposit. If that is the case, you may want to get the last month’s rent paid in advance. If you can charge at least two months’ rent, never collect the last month’s rent up front. Collect a deposit equal to two month’s rent instead.

Dollar for dollar, a deposit is always worth more than prepaid rent. Prepaid rent will be 100% used for the tenant; a deposit will be 100% used by the landlord to make them “whole” again.

Deposit Red Flags

So, you have a rental, and a nice tenant(s) applies. They do not have enough for a full deposit, or at least that is what they tell you. When a tenant cannot come up with the full deposit, that is a huge red flag.

Scenario One: Lack of Emergency Funds

The tenant flat out does not have the money. If the tenant does not have emergency funds, and that is what they are telling you when they do not have a full deposit, you need to run away. They should be getting a deposit back from the previous landlord, which can be used to replace the emergency funds they give you.  You will have rent collection issues at some point, and you will be in worse shape than if you had let the rental go vacant.

Scenario Two: Not About to Lose Possession of Their Money

If the tenant has the money for a deposit and says they do not, that is even worse. And you will never really know, as you will decline them. They are afraid that they will not get the deposit back, so they do not want to part with the money. They already know, based on past experience, that their deposit will likely be kept, and it is better to be in their own hands, and not in possession of the landlords.

Deposits Paid After Move-in Never Come

Some tenants do not have the money up front for the deposit, so they offer to pay a bit extra each month.  They are sincere and really want to pay more. If they do not have the money before move in, why would they magically have it after the move in? It will never come, and eventually your rent will never come. Get the full deposit before any keys get turned over — ALWAYS.

Never Let a Tenant Use the Deposit

Some tenants like to use the deposit for the last month’s rent. You only collected a month’s rent for a deposit, and somehow in the tenant’s mind, they think it is a good idea for you to go along with the idea.

The tenant expects you to trust them to return a place to you without any damages. They think you will trust them to return the unit 100% as clean as when they received it. Do this one time, and it will be your last. They used your rent as a deposit for their new place and left you with the expenses of their crazy, out of control lifestyle.

You would not let them use the deposit to purchase a new car, so why would you allow them to use it for rent?

State Laws and Last Month’s Rent

Some states, including Minnesota, make it illegal to use the deposit for the last month’s rent. That means it is illegal for the TENANT to use it, not the landlord. You can both agree to use it (though why would you?), and a landlord can use it to reimburse themselves for rent that is/was owned. Once a tenant moves out, unpaid rent becomes damages and is deducted from the security deposit.

I collected the last month’s rent from a tenant once. After a year, they used the last month’s rent as their rent payment, which was the purpose of it. And then the tenant stayed! So my deposit was cut in half. It sort of caught me off guard and was a great learning experience. They stayed another 18 months and left without proper notice or cleaning out the apartment. It would have been nice to have that money to cover my expenses.

When a tenant pays the last month’s rent as part of the move in funds, get a signed lease termination before they are allowed to use it. The last month’s rent is exactly that, used for their last month of residency at your place. Not the last month of the first lease term.

Related: The Top 14 Tips Landlords Wish Their Tenants Knew

When is it Acceptable to Get a Lower Deposit?

Simply put, when you have lower risk. If you have a tenant with a 740+ credit score and 5x+ the rent in income, they are a low risk. Even though I have many tenants in that category, I get the same deposit. One time, I lowered the deposit by $150 to the rent amount to give additional incentive to the tenant to move in. The tenant was a nurse practitioner (steady job, high income) and the credit score was 784 (rockstar).


Mitigate your landlord risk with great tenants. Get a full deposit; you may very well need it. Keep the deposit until the tenant has vacated and you have had a chance to assess the damages. Then, return the deposit back to the tenant less any deductions, as you should.

Do you have any interesting tenant deposit stories? What is your policy on deposits, or what have you experienced as a tenant?

Be sure to leave your comments below!

About Author

Eric D.

Eric is a 55 year old, soon to be former, computer professional. He started several years ago to replace his “work income”, with other alternate streams. He is well on his way to retirement at age 56, and is currently making more money at extracurricular activities, than he is working at his full time job. Whether that is Financially Independent, or just old fashioned entrepreneurial spirit, is in the eyes of the beholder.


  1. Curt Smith

    Good points re applicants not having enough cash to cover move in. I don’t want them either.

    Some more points. I use, a pain to set up but you get full credit report and a list of past rentals. Match them up with their past rentals on your application. It’s a red flag if your app doesn’t list past rentals in the same order and without missing addresses. Applicants will skip the most recent or past rentals they where evicted from.

    My only eviction from my B class nice places was my own fault:

    – applicant showed up 2 days from the 1st. Gave a story I didn’t verify that the landlord was selling the house.
    – Gave checks for 1st month and security deposit that ended up bouncing. I now only take money orders for move in funds. 1st month and security deposit.
    – He skipped the most recent address on my application vs what’s in public records.

    In summary, never take last minute applications. Always get money orders. Always match up your app’s last addresses with your renter check. Always call past landlords. Drive by the current address given to check for being a mess and ideally see their car there.

    Always check the inside of their car. A mess in their car will be how they keep your rental.


    • Thank you for the comment and great tips!

      I rarely require a cashiers check, as if the credit score is good, the checks do not bounce. And typically, I have a $1,000 holding fee I received a month+ prior.

      Quick move ins are a huge red flag.

  2. Bryan O.

    I recently had a tenant that couldn’t quite pony up the full deposit, first month rent, and animal deposit. They said they could have it in 2 weeks. Everything looked good on their credit and background. I will not sign a lease without all the money up front with money order or cash. I also will not let my property sit vacant! I took 50% of the total amount and signed a binder agreement that said I would hold the place for the 2 weeks. If they signed the lease before the end of that time their binder consideration transfers to the move-in costs. If not, I keep the money and relist the place. Seems like a win-win and they were really happy about it.

    • Thank you for the comment!

      I generally get $1,000 when they bring in the application. I keep marketing, and showing, until I get a holding fee. Once I get a holding fee, that money is like the fee you get, just a different term.

      PS. Do not wait two weeks, 3 days at the most.

      • Deanna Opgenort

        Doesn’t that depend on your market? In an urban area with a lot of potential renters you can afford to pass on one good potential tenant and just wait for the next good tenant (lots of fish in the sea, right?). In a rural area/small market there might only be a 2-3 acceptable tenants looking to move in your time frame. Better to wait a week than to settle for one of the less-desirables.

      • Thank you for the question!

        A deposit is to protect/mitigate your risk. Risk is relative, a $20K rental, vs. a $150K+ rental would have different deposit requirements, even if the rent was the same.

        I have done some risk based pricing in the past, based on credit score, but basing the higher rent price on lower credit scoring people I decided was not even worth an extra $100 per month.

        I would hesitate to lower the deposit below one month’s rent anywhere, as it is an accepted practice and a norm for renters. Taking less deposit, especially from a lower scoring tenant, will only lead to the landlord paying for any damages.

  3. Tim Jones

    Great article. I’ve been renting rooms in my house for 5 years and have ran into every situation that you listed above. Sometimes it makes for a difficult discussion, but it’s much better to stick to your guns and not let someone in if they don’t meet the criteria. Not enough money for a full deposit is a common one. Thanks!

    • Thank you for the comment and confirmation!

      I hear all the stories too. And sometimes, I hear landlord say it’s better to get a tenant in, than be vacant. While that may be true, it’s only true if it’s a great tenant.

  4. Lane Lundeby

    I own a condo in Grand Forks, ND and typically rent to graduate students and or students looking for a quiet place, as most of the folks in the Condo are 65+. I have had good luck allowing renters pay portions of the deposit over the first 3 months. For example it is $750/Mo for rent and we require a $750 deposit, in many cases I have allowed $1000/mo rent for the first 3 months to allow the student to pay over time.

    Overall that has not been an issue but that is most likely because my typical renter for this property is a college student. When I am not renting to college students I tend to be less flexible and request the deposit up-front.

    • Thank you for the comment!

      That is certainly a risky strategy, especially if the person has a low credit score. I would guess, that most students you rent to, especially Grad students, have a hither credit score.

      I have heard that North Dakota has one of the highest, on average, credit scores in the nation.

      If you had a problem, and had to evict in the first moth or two, you would be out of luck with the deposit.

  5. Seth Greiner

    Great idea to have a higher deposit than rent. I want to start implementing this right away to make sure I don’t have tenants trying to get away with that. It hasn’t happened so far but I only have several rentals. Thanks for saving future headache!

    • Thank you for the comment!

      As long as you get solid tenants, the deposit amount is not as important. Always get a bit more than the rent. For lower quality C and D rentals, get an even larger deposit.

  6. Ayodeji Kuponiyi

    Income will tell you the tenant’s ability to pay rent; Credit score will tell you the tenant’s desire to pay rent. The words can’t be any more true. I made the mistake of letting my tenant use his last deposit as rent and then he renewed his lease with me. He still pays his rent thankfully but I’ll definitely apply this moving forward.

    • Thank you for the comment and confirmation of my post!

      It’s frustrating when you feel they pulled a fast one on you, I described the same thing happening to me. Live and learn, and only have a deposit, not any prepaid rent. Of course, if you have limits by the State, then you have to go with prepaid rent.

  7. Tyson Luthy

    Great advice in this article! I always like to spend some time looking at the payment history when I run the credit and criminal report.

    I don’t let credit alone become a “deal-breaker” for me as there are some cases where a tenant is a victim of circumstance and has poor credit – but overall the credit score can tell a lot!

    Thanks for the article!

    • Thank you for the compliments!

      I use credit score a great deal. I find that the very lower scores, under 600, typically will have a lot of tenant drama if you let them in.

      High and low credit score are relative. Some landlord’s high scores are less than other landlords low scores.

    • I have never increased the deposit when a renter is in the unit. As a tenant lives there longer, the wear and tear is greater, and repairs are less.

      With my carpet example, after ~5 years, carpet probably needs to be replaced anyway. So nothing can come out of the deposit for it. The longer a tenant stays, the cheaper it is for the landlord.

  8. Fred K.

    How do you handle a problem that does not show up until after you have done the checkout inspection with a tenant. I had a case where we did the move out inspection and the carpet was still wet from being cleaned by the tenant. Next day we went back to fix items and the house smelled bad. Found out it was the carpet. Pet urine on back of carpet and cleaning It caused the smell. Carpet had to be pulled up and replaced including the pad. Could we have gone back after the tenant for the carpet?

    • Maggie Tasseron

      Hi N.A.N.: I don’t know where you’re from but here in California, the landlord has 21 days to return their security deposit, for exactly the kind of reason you describe. I usually tell departing tenants this, and add that it will probably not take that long for me to return it; that way, I leave my options open. You can still do a checkout inspection with the tenant, but you are not obligated to return their deposit at that time.

  9. Katie Rogers

    When I was a tenant I refused to give any landlord my SSN, drivers license number, bank account numbers. That is simply too much personal information in the hands of property managers. Sure, there were some landlords who refused to consider me. Their loss. On the other hand, I brought a great deal of alternative documentation that tells a landlord more about my ability to pay, my quietness and my cleanliness than any credit report. What I really resent are landlords who have affiliate relationships with certain credit reporting companies and require prospective tenants to bring them a credit report from that specific company, all the while refusing the free credit report I actually bring.

    I never forget what it was like to be a tenant.

  10. doc splanb

    solid advice. what i’ve learned from my decades in the trade..

    1. credit reports tell you nearly everything you’d need to know. really. three cell phone companies after them? did they stiff the emergency room for $500 for over three years? do they have a massive balance and only one card?

    2. if they cannot afford the deposit, they cannot afford the place.

    3. if they cannot fill out an application legibly and completely then then they are generally discourteous and a little stupid. if they leave info off the app it’s for a reason.

    4. join the local apartment owners association in your town/county and learn the law in your trade area. sooner or later some tenant will “fill you in” on the law as they heard it from some rummy at their favorite bar. they will rarely be even close to correct.

    5. toss ’em around before they move in. everybody’s your best pal as you’re tossing them the keys…after t a few months they sometimes get chesty…best they know that your appetite for that is very low.

    6. keep a running log of all events. get tenants in the habit of seeing things in writing and signing a copy of notices, for the file, which they get a copy of. this helps them understand that this is a business for you and you treat it that way.

    7. treat all tenants with the respect they earn. some are gold and should be treated that way. others. not so much

    • Katie Rogers

      Some of this is reasonable. Some not so much.

      1. Credit reports will not tell you all you need to know. They will not tell you if the tenant is quiet and clean. Plenty of terrible tenants have fine credit reports. As far as the emergency room bill goes: I used to be a medical biller. Hospitals routinely bill for procedures never performed or double-bill the medications, or whatever. It is not the biller’s fault. The biller sees a summary of services, not the actual chart. However, it is definitely somebody’s fault. If there is a $500 emergency bill from three years ago, very likely the tenant paid all but the $500 they did not actually owe, and must simply wait it out. Very likely the tenant does not know that they are entitled to ask the hospital to audit the bill. An audit simply compares the bill to the actual chart. Such an audit will generally reduce a hospital bill by about 20%. Everyone should have their bill unbundled and audited before they pay a penny.

      2. In my town, the first month’s rent plus deposit is quite a bit of money, more than $3000. In the US, most people do not even have $2000 saved up in an emergency fund, so in my town landlords sometimes allow the deposit to be paid in installments. However, generally in most parts of the country, tenants should be able to afford the rent and the deposit. This assumes that the rent is fair. It used to be that landlords priced their units in terms of average tenant wage. Landlording books advised rent to be no more than one week’s wage. Today, many landlords have turned that advice upside down, and require the tenant to make at least 3 times the rent.

      3. If they leave info off the app, it is for a reason. Perhaps the reason is the landlord should not be asking for it in the first place. I once saw an app asking for mother’s maiden name. No landlord needs that info. I also have never provided SSN or bank account numbers. I usually use my passport as ID. Property manager’s file cabinets are a gold mine for identity thieves. When I was a tenant, I vetted landlords, and did not rent from landlords who required credit reports or insisted on “complete” applications. No landlord of mine was ever sorry, and they always got their property back not only broom-clean, but move-in ready. Why did they rent to me in the first place. They could tell from talking to me that I would be a great tenant.

      4. Landlords should study up on the law. Good on the tenants who also studied up on the law. It is easy to find the tenant-landlord law for each state. Local ordinances are also readily available. Law-abiding landlords have nothing to fear from tenants who know the law.

      5. Huh? “Toss them around..”?

      6. Tenants, make sure you keep a running log of all events. Send maintenance requests by email or letter. Try to have as much as possible in writing.

      7. Tenants, treat landlords with the respect they earn. Some are gold and should be treated that way. Others, not so much.

      See, a lot of this goes both ways. Landlords need to respect the fact that the tenant’s hard work at often difficult, lower-paying jobs is what is paying the mortgage. Landlords need to respect tenants as people who deserve to have a decent place to call home, not merely a legally habitable place. Tenants are people, not wallets.

      • doc splanb

        yes, katey, i toss ’em around, good and damn hard. if i ask for it on an application it’s for me to decide what is important and what’s my business. the experienced landlords know…get the terms clear before the keys change hands. the “tossing” let’s me gather the worthy and toss the roaches back.

        one thing i omitted from my rules is that all tenancies are month to month…that way i can toss the ones that get chesty or become a nuisance. i gave a nuisance tenant the door just this month. the turnover will be a chore but the PITA will be someone else’s. most tenants stay for years…i keep the homes well and careful screening get’s me folks that do the same

        you vet me? lordy! plainly speaking, you’re exactly the tenant i pass by for failure to understand that yes, i DO need your social to run your credit which is the first line of keeping crummy tenants out of my homes. you can bring me all the credit reports you have but the one i rely on is the one with only MY fingerprints on it. FYI, my rents run the gamut from $890 to $5,400 per month so i have EVERY demographic represented and ALL were given the same rigorous screening to assure they are quality tenants.

        every single experienced landlord here is groaning at the tone of your reply and tossing the application as incomplete.

        if they cannot afford the deposit, they cannot afford my property. people with no money are broke for a reason. unless they’re widows or orphans…they need to go get more money. those who let folks in their unit without a good hard look including a credit report and a full deposit are naive.

        my advice derives from over 25 years of managing my properties as well as properties for clients. having been burned by some real smooth BS artists, the rules i run by are from hard lessons learned and ALWAYS at the expense of MY wallet.

        • Katie Rogers

          I do agree with the month to month. As a good landlord, I know that I do not need a lease to keep a good tenant. They will stay for years and years on a month to month. If, by some chance my Golden Rule policy land me a terrible tenant, the MTM is very handy.

          Although you say you would pass me by when I was a tenant, that would have been your loss if you are as good a landlord as you say you are. You would have a refused a great tenant who stays for years and leaves the property not just broom clean, but move in ready. If I did not feel you would not have been a good landlord when I interviewed you, I would not have rented from you, so it’s all fine. If my sin was expecting landlords to treat me respectfully as a human being, and not just as a wallet, so be it. Although I have encountered plenty of crummy landlords with bad attitudes, the ones I rented from tended to be good precisely because I vet them.

          So I suppose you would never consider a tenant from a foreign country who has no credit report. Or an American who just came back from a long stint overseas and whose credit report says “insufficient data” because they were in a cash economy for so long. I have dealt with both these issues, and both tenants were stellar. Who knows how many landlords refused them out of hand because they came with a story and no credit report?

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